Another pocket of value is retail/consumer. Online shopping trends have accelerated during the pandemic, to the benefit of Amazon, Chewy, Costco and others. On the other hand, store-based retail and the real estate underneath it, has been left for dead. However, many of these companies are navigating the difficult secular trends by adapting their businesses—closing stores, improving their online business to also include buy-online pick-up in store (BOPIS), curbside pickup, and other omnichannel methods. By keeping tighter reins on inventory and cutting costs, some are not only surviving, but thriving.
Not all retailers will endure, and many will in fact liquidate and disappear, relenting market share to the survivors. For the underlying real estate, savvy management teams will navigate the transition, attract new tenants, and undertake thoughtful and creative redevelopment projects. Oftentimes these malls and other real estate have good locations but just need to reinvent themselves for the future. Picking through the rubble and differentiating the survivors from the dinosaurs is another contrarian way to generate returns.
A third example would be companies with stressed balance sheets. The pandemic has drained liquidity from many companies. Those that were unfortunate enough to come into this time with too much debt already have suffered even more. However, if a business is sound and has a reason to exist, there are ways to alleviate this balance sheet stress and provide relief.
Exchange offers, debt-for-equity swaps, rights offerings from equity holders, pre-packaged restructurings, or Chapter 11 bankruptcy filings are all processes to fix leverage problems. Not all businesses with too much debt are worth saving. However, the ‘good business, bad balance sheet’ opportunities, while complex, can be extremely rewarding.
Just like in the equity markets, tech and growth are dazzling, but the recent rotation to value and cyclicals is well underway. Fundamental credit investing can identify some of these pockets of value and deep value situations, and underweight or avoid overvalued segments of the market. The easy beta has been made—but there is always alpha to be found if you know how and where to look.
Jeffrey Rosenkranz is a portfolio manager and Christopher Walsh is a portfolio analyst at Shelton Capital Management.