Will Europe’s First-Half Stock Winners Keep Surging in Second?

(Bloomberg) --

A mobile-messaging firm, food-delivery companies, video-game makers and medical-equipment suppliers racked up the biggest gains in European stocks in the first half because of the pandemic, and some are likely to be long-term winners even if the outbreak recedes.

The novel coronavirus forced much of the world’s population into lockdowns and created an urgent need for hospital gear and medicines, benefiting Swedish messaging company Sinch AB, German meal-kit supplier HelloFresh SE, health-equipment manufacturer Ambu A/S and others.

Shares of food-delivery and electronic payments companies should benefit even if the outbreak fades, said David Moss, a fund manager at BMO Global Asset Management in London.

“Those trends will carry on because they’ve not been caused by the pandemic--they were there already,” Moss said in a telephone interview. “The pandemic’s accelerated that change.”

While the coronavirus will lead to a permanent increase in working from home, Moss said, it remains to be seen whether we return to life as we knew it pre-outbreak -- going to the cinema as much or traveling as often, for example -- once lockdown measures are eased. The answer to that will determine whether many of the first-half winners can hold on to their gains.

Here are some of the biggest gainers in the first half of 2020:

Work-From-Home Winners

As home offices sprang up across Europe, demand surged for the tech needed to keep businesses’ operations going. The biggest gainer in the Stoxx Europe 600 Index in the first half is Sinch, whose shares have jumped more than 170%. The company provides those automated messages that tell you that a taxi or a parcel are on the way or remind you of a doctor’s appointment. The number of sent messages surged about 60% in the first quarter, Sinch said.

Read: The Swedish Mobile Message Provider Whose Shares Keep on Rising

Germany’s TeamViewer AG, which makes tools for remote access to computers, has been another winner, with its shares up 49% this year. The virus is likely to boost demand for software and particularly cloud applications, Bank of America Corp. analysts said in a recent note. In a survey of 500 organizations, cloud communications and video conferencing were the top budget priorities for 2020, the bank found.

But the sector could see a bumpy ride in the short term, judging by the hiring intentions of European software companies, the analysts wrote: Job postings by the industry are down 60% on average on careers websites.

Food Delivery

HelloFresh SE, the German meal-kit delivery service, hovered at a record high as the end of the first half approached, benefiting from restaurant closings and stay-home orders. The company already enjoyed strong growth before the pandemic and the success should continue once normal conditions return, said Robert Berg, a Berenberg analyst who recommends buying the stock, up 143% this year. HelloFresh has seen “regular or even better-than-usual retention rates from new customers,” boding well for the second half and beyond, he said.

British online supermarket Ocado Group Plc also hit all-time highs, with online shopping slots from the company hard to come by. While the temporary benefits of Covid-19 will taper off, a portion of the population will decide not to go back to the way things were and this will benefit Ocado, Peel Hunt analyst James Lockyer said by email. He said Ocado had the potential to build on its success by disrupting other markets through nascent investment in robotic meal prep, vertical farming, and its Ocado Zoom real-time delivery.

Payments Firms

Electronic-payments stocks surged in the first half, bolstered by increasing e-commerce and a growing reluctance to handle cash, with Dutch payment platform provider Adyen NV up 76% and Italy’s Nexi SpA up 19%. One big exception to the rally: Wirecard AG, which unraveled as the company said it uncovered fraud.

Adyen’s revenue rose by more than a third in the first quarter, weathering a hit in the travel and accommodation sector. The shift to digital payments, already in place before the pandemic shuttered economies around the world, will get new momentum, said Thomas Fitzgerald, a fund manager at EdenTree Investment Management Ltd. who owns shares in PayPal Holdings Inc. and Visa Inc.

“People during this pandemic have moved to digital payments for the very first time, and that creates a new cohort of consumers,” he said in a telephone interview. “Whether it’s Adyen, whether it’s PayPal, whether it’s Square, I think there is a very strong fundamental backdrop for this sector in a post-Covid world.”

Online Entertainment

Video-game stocks outperformed the broader market as people turned to gaming and online entertainment as a boredom buster during the lockdowns. Poland’s CD Projekt SA jumped 41% even though it delayed the premiere of its Cyberpunk 2077 game, while Swedish online casino platform Evolution Gaming Group AB, which is looking to buy smaller rival NetEnt AB in a $2.1 billion deal, more than doubled.

Game makers do well in a recession because people can still afford to spend on new titles, whereas they might not be able to afford a house move or a car, said Andrew Bryant, a Liberum analyst. He covers smaller U.K. companies such as Codemasters Group Holdings Plc, Team17 Group Plc and Frontier Developments Plc, which have all gained more than 20% this year.

“You could see the froth come off the sector in the short term as people come out of those lockdown equities,” Bryant said in a phone interview. “But, fundamentally, these companies are all in a great place to go on and deliver substantial earnings growth over the next five years, both organically and through M&A.”

Diagnostic Testing

The spread of Covid-19 has spurred a surge in global demand for diagnostic testing, with shares of companies such as BioMerieux and DiaSorin SpA jumping about 50% in 2020. With concerns mounting over a second wave of the virus, the momentum for testing stocks isn’t likely to fade any time soon, said Kempen analyst Alex Cogut.

That may not be a good thing for the companies that have benefited so far, however, according to Ketan Patel of EdenTree. “Given the focus on Covid, we are likely to see more players enter the market and act as disruptors,” he said.

Medical Equipment

Ambu’s shares have risen more than 90% in 2020, with heightened demand for its single-use scopes that can help prevent cross-contamination in hospitals as well as life-saving breathing equipment. Investor focus is now on Ambu’s launch of its single-use duodenoscope, said Yiwei Zhou, an analyst at SEB. If successful, the stock’s outperformance should continue, the analyst said. The launch is scheduled for this year, the company said last month.

A tough economic environment also will help sustain valuations of medical-technology and diagnostic stocks, which tend to do well during recessions, said Cogut. “Given that the timing of economic recovery is uncertain, I think such stocks will continue to be preferred by investors into the second half,” he said.

Laboratory Equipment

With investors looking for sustainable longer-term growth, some of the biggest gainers in Europe have been companies such as Sartorius AG and its Sartorius Stedim Biotech unit, which make gear used for drug development and basic science. The stocks are up about 42% and 51%, respectively.

While Sartorius has seen a boost from Covid-19-driven demand, the company also has benefited from being in a structurally growing industry, said Intron Health analyst Naresh Chouhan. “In this market where defensive growth is highly prized, I’d imagine it will continue to do quite well over the next 6 to 12 months,” said Chouhan, who has a buy rating on the stock.

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