Morningstar - Q4 2020 - 48

Spotlight: World After COVID-19

to be successful during the pandemic and after.
In addition to developing their own competitive
online presence, they must be able to provide a
combination of service, convenience, and
experience for which consumers will be willing
to pay a premium. Those retailers that sell
nondifferentiated products, have poor online
execution, and are unable to provide a
valuable in-store experience will struggle to
survive in this new environment.
Similar to the restaurant industry, we're seeing
an increasing number of bankruptcies in the
retail space. Already this year, several brands that
serve as anchor tenants for malls-such
as JC Penney JCPNQ , Lord & Taylor, and Neiman
Marcus-have filed for bankruptcy, as have
other familiar brands, such as Ann Taylor,
Brooks Brothers, GNC, and J. Crew. While many
of these retailers will use the bankruptcy
process to restructure their capital structure, close
underperforming stores, and re-emerge,
many others will be forced to liquidate their
merchandise and close for good.
Malls are another area inevitably struggling with
decreased traffic. In recent years, malls
have been moving away from relying on the power
of their location and looking to make their
locations more "experiential"-for example, by
revamping closed stores for use as restaurants,
physicians' offices, exercise facilities, and
other experiences that cannot be replicated online.
By accelerating this trend, many mall owners
are aiming to recapture foot traffic as consumers
become more willing to venture back out
into the public.
To determine the impact to mall operators, we
adjusted total retail sales to compare sales
that we view as relevant to both retail REIT
tenants and e-commerce. (In other words, we
stripped out categories such as gasoline,
grocery, and building materials.) By our estimates,
e-commerce sales growth will average in
the midsingle digits over sales growth for brickand-mortar retailers for the foreseeable
future. Using these calculations, we forecast
that e-commerce sales as a percentage of
modified retail sales will grow to 42% by 2028
compared with 22% in 2019.

48

Morningstar Q4 2020

While this shift will have a significant impact
on brick-and-mortar and mall-based retailers,
we expect that the worst impact will be to
lower-quality malls that are already experiencing
declining foot traffic. We expect that over
the long term, higher-end mall REITs, such as
Simon Property Group SPG and Macerich
MAC, will maintain their ability to drive foot
traffic and, therefore, be able to both preserve
their strong tenant base as well as attract
e-tailers looking to establish a physical presence.
Both of these companies' stocks have been
hit hard this year, but we see value as both are
trading well below our fair value estimates.
New Trends Advance
The short-term impact on our lives and the
economy has been unparalleled in modern history.
Yet, with a vaccine that we think will be
widely available in the U.S. during the first half
of 2021, we expect the long-term impact on
total U.S. GDP will be minimal.

Undervalued Stocks
Still Available
Investors have priced up stocks they believe
will benefit from changes in consumer
behavior caused by the COVID-19 pandemic.
We think that in many cases investors
are getting ahead of themselves, leading
us to rate some of these names 1 and 2 stars,
meaning that we think they are overvalued.
At the same time, investors reacting to
the pandemic have punished some sectors-
mainly energy-too severely or have
overlooked some stocks in key industries
that stand to benefit in a post-COVID-19
world. Below are a few of these stocks rated
4 or 5 stars.
Work From Home

However, the pandemic has led to an acceleration
of several consumer behavioral trends that
will have a significant impact on particular
sectors. As such, in many cases, the markets
have already priced those changes into those
companies' stock prices and, in other cases,
have overestimated the long-term impact. While
some stock prices have soared above our
estimates of intrinsic value, we continue to see
value among others in which the markets
remain overly pessimistic. K
David Sekera, CFA, is chief U.S. market strategist with
Morningstar Research Services.

Company

Morningstar
Rating

Cisco Systems CSCO

QQQQ

VMware VMW

QQQQ

Social Distancing
Company

Morningstar
Rating

Carnival CCL

QQQQ

ConocoPhillips COP

QQQQQ

ExxonMobil XOM

QQQQQ

Hyatt H

QQQQ

Norwegian Cruise Line NCLH

QQQQ

Restaurant Brands Intl QSR

QQQQ

Schlumberger SLB

QQQQQ

Wyndham Hotels & Resorts WH

QQQQ

Yum Brands YUM

QQQQ

Acceleration of E-Commerce
Company

Morningstar
Rating

Macerich MAC

QQQQQ

Simon Property Group SPG

QQQQQ

Data as of 09/30/2020.
Morningstar - Q4 2020

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