There are good returns to be made with tech companies that require subscriptions and other ongoing payments, according to one advisor.SDI Productions/The Globe and Mail
Work-from-home (WFH) investments have been in focus since the beginning of the pandemic as the COVID-19 crisis changed how and where people work, shop and spend their free time.
Stocks of companies involved in remote work products, services and technologies have brought healthy returns for investors, both on their own and rolled into exchange-traded funds (ETFs) that track the trend.
But when the pandemic eases and people return to the office, experts caution that direct WFH investments may have had their day or realized their upswing.
Still, with every sign that a hybrid work model may continue, technologies and services that back it up are likely to remain relevant.
“Now is the time to be more selective in terms of what themes were a shorter-term phenomenon and what will have a lasting impact,” says David Kletz, portfolio manager at Forstrong Global Asset Management Inc. in Toronto.
He says it’s important to differentiate WFH investments geared specifically toward work from those focused on leisure – with the former more likely to have staying power.
The two ETFs that were started in 2020 to track the shift toward remote working and living show this quite dramatically.
Direxion Work From Home ETF WFH-A, with assets under management (AUM) of US$105-million and a management expense ratio (MER) of 0.45 per cent, has holdings largely in technology and communications and returned almost 4 per cent in the past year.
Meanwhile, iShares Virtual Work and Life Multisector ETF IWFH-A, with an AUM of US$6-million and MER of 0.47 per cent, comprises more of consumer-oriented companies that support virtual entertainment, wellness and learning. It has fallen by more than 30 per cent.
Mr. Kletz says the Direxion ETF “hit the nail on the head,” given its holdings in cloud computing, cybersecurity, document management, and remote communications.
“With companies that are now embracing a hybrid work model, those four areas are of absolutely critical importance,” he says.
On the other end, the lifestyle companies in iShares Virtual Work and Life Multisector ETF “had a steep uptake during lockdowns, but a lot of that has kind of blown over as things start to reopen again.”
Mr. Kletz says it’s important to invest in companies that will gain marginal revenue as workplaces remain flexible about whether people come to the office or stay home.
For example, given the vulnerabilities and needs that companies face with such decentralized workforces, he likes Evolve Cyber Security Index Fund CYBR-T, which has an AUM of $196-million and MER of 0.40 per cent, and First Trust Cloud Computing ETF SKYY-Q, with an AUM of US$5.7-billion and MER of 0.60 per cent.
Mr. Kletz says that if businesses “embrace a hybrid model en masse,” telecommunications companies will benefit from people upgrading their internet capacity at home, perhaps even subsidized by their employers.
While it’s not a “high-octane type of growth story,” telcos are stable and mature, “and this will be a medium-term to long-term positive for them,” he says.
Difference between a good business and a good investment
Dan Hallett, vice-president of research and principal at Highview Financial Group in Oakville, Ont., cautions that “it’s difficult to know how the future of work will look.”
For example, leasing activities in downtown cores are “still pretty robust,” he says. “It seems reasonable that if you’re going to bring people back in the office, they’re probably still not going to be sitting as close together as they have been.”
Mr. Hallet, who has worked remotely for Highview for 12 years from his home in Windsor, Ont., says the WFH “impacts that we’ve seen in the past almost two years have not been new trends, they have accelerated existing trends,” such as the decline of traditional retail and rise of video communications.
He warns there may be other factors that have an impact on WFH stocks and funds.
Even advisors don’t apply rigorous analysis and due diligence to understand the true investment merit of any such stock, beyond the WFH story “that can influence shorter-term price moves,” he says.
It’s critical for investors to distinguish between a good business and a good investment, Mr. Hallett says.
“A good business can be a terrible investment if you pay a high enough price,” he says, noting that “not a lot of stocks are dirt cheap today.”
Stock picks in tech
Jeff Hull, senior financial advisor at Manulife Securities Inc. in Mississauga, says many WFH and cocooning companies “had their time in the limelight,” with the biggest returns made in the early days of the pandemic.
Many are now overpriced and facing competition, so the trajectory of their growth has slowed. But he points out there are good returns to be made with tech companies that require subscriptions and other ongoing payments.
One of his favourite such stocks is Microsoft Corp. MSFT-Q, which “had to pick up its socks” under competition from Zoom Video Communications Inc. ZM-Q with its Teams application and benefits from subscription fees from users.
Mr. Hull also likes Adobe Systems Inc. ADBE-Q for the same reason, and indeed he uses both platforms in his business.
“Whether the markets are up or down, or we’re in a boom or bust, Microsoft and Adobe are getting that monthly money from me,” he says.
Another strong subscription economy stock is Intuit Inc. INTU-Q, the tax, accounting, and business bookkeeping software giant, Mr. Hull says. He notes that consumers and businesses alike use its products every year to do their taxes.
“It doesn’t matter if there’s a boom or a bust, COVID-19 or not, they continue to soldier forward.”
Mr. Hull says he also feels strongly about Nvidia Corp. NVDA-Q, which makes microchips for artificial intelligence and other purposes. It has more than 90 per cent global market share of the chips in video-game units.
“I’m personally not investing in video game companies directly,” he says. “I’d rather buy Nvidia and get access at arm’s length to video gaming, but access to all the other chips that go into devices for businesses.”
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