It’s hard to escape increased chatter about yet another lockdown. So what could it mean for stocks? Based on what happened last time, I’d suggest gaming, tech and health as industries that could be well positioned to benefit from any increase in uncertainty and these are the three companies I think could outperform.
Growth industry
When it comes to gaming, one of my favourite shares is Team17 (LSE: TM17), which I bought during 2020 but have sold and no longer hold. The shares, while expensive relative to many other industries, have faltered in recent months so are better value than they have been in the past. Team17’s price-to-earnings ratio (P/E) is well below that of Sumo Group and even below that of Frontier Developments. So in an expensive sector, its share seem good value to me.
It’s founder-led and the CEO has around 22% of the shares, so Team17 management has every incentive to run the group well and in the interests of shareholders. Aligned incentives between management and private investors are things I like to see, as do investors like Lord Lee, the first ISA millionaire.
When it comes to downsides the stock pays no dividend, so growth has to come just from the share price performance. That has been underwhelming in recent months. The high P/E also means anything less than stellar growth is likely to be punished. I might wait for the shares to fall further before buying again.
Antibody testing
The healthcare group EKF Diagnostics (LSE: EKF) is another stock I expect could benefit from even just increased talk of another lockdown. Part of its business is involved in antibody tests, which have been used in the fight against the pandemic. There’s an immediate catalyst for growth.
Beyond that though, based on the fundamentals, there’s a lot to like. Revenue and operating profit are growing year-on-year and at a strong rate. For example, the latter grew from £5.78m in 2019 to £16.9m in 2020. The business has high margins and returns on capital invested – indicating that it has pricing power and should be able to do well longer term.
If there’s a situation where Covid recedes significantly then the share price might take a temporary knock given that EKF Diagnostics is associated with antibody testing and Covid specifically. Yet despite that, I think the stock has long-term potential based on its growth, margins and high returns on capital, so I may buy the shares.
One of the best growth stocks
Tech was another winner under previous lockdown conditions, which only served to accelerate the trends towards digitalisation that was already under way. I feel one of the best stocks for tapping into this long-term trend is Kainos (LSE: KNOS). Over five years, its shares have just about 10-bagged. That rapid share price growth indicates that Kainos is an impressive company but that it’s no ‘hidden gem’.
Again, because the P/E is very high, the company needs very good operating performance and strong earnings growth. Yet the company taps into some trends that will last for years, if not decades, to come and so I’d be confident buying the shares.
Andy Ross owns no share mentioned. The Motley Fool UK has recommended Frontier Developments and Kainos. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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