Some overly optimistic investors are happily predicting a return to “normal” as nation’s ease their lock down restrictions. Unfortunately for them the world has changed and investing in the same ways you did in 2019 is a recipe for disaster. From supply chain complications to stimulus overshoots we will explain a few likely trends investors need to take into account. Nevertheless, it is also a moment of opportunity, and finding the right sectors to invest in is the key. We will use mobile gaming as an example of one such sector, and walk you through its advantages. The company we chose is LEAF mobile inc (TSX.V: LEAF) whose spring counter cultural game release provides an insight into the sector’s resilience and an excellent case to study.
Avoiding the blind V: do not let false hope fool you
Optimism in moderation is practically a requirement for the smooth functioning and growth of markets and investment, but too much of a good thing, at the wrong moment, is quite dangerous. Right now people are looking for an excuse to get hopeful, and the recent ‘rebound’ in the stock market is both a product, and impetus, of this optimism.
With covid cases on the rise again, and no vaccine in sight, it is safe to say we are not heading back to business as usual any time soon. Another strong indicator of the difficulty of this ‘recovery’ is the debt market, where treasury and other bonds are not showing any of the signs of confident recovery. And when the market realizes this, the shallow bubble of confidence may very well shatter, sending stocks and valuations crumbling again.
How to avoid this? Steer clear of the trends. People are rushing to invest in the ‘big five’ tech giants, whose prognostics were never that bad, and who generally operate in fields relatively immune to the specifics of this crisis (or in Amazon’s case, who can benefit from it!). Furthermore, as a Forbes contributor recently reminded us “the largest five holdings make up a greater percentage of the S&P 500 than during the top of the tech bubble”. This means that in an ironic sense, they are no more ‘immune’ to the crisis than the stocks which have crumpled, as they are affected in the opposite direction and artificially buoyed by the rebounding optimism. This is the false, or blind, V shaped recovery we are trying to steer clear of.
Plenty of smaller companies have not seen this hopeful resurgence, but operate in the same sectors unaffected, or even benefited by, the crisis. These are where you should have your attention, and mobile gaming is a great example. There are dozens of small and specialized companies making headway despite the times, companies poised only to accelerate as people turn to newer, more isolated, forms of entertainment. Mobile gaming is an excellent example of this; the sector is already robust, yet still expanding with regular growth and promising numbers despite the downturn. Companies like LEAF Mobile inc who have carved out a niche for themselves (making them less vulnerable to volatility or competition) in counter-cultural “green” games make for particularly clever investment right now. Thinking ahead here is the key, don’t blindly follow others into a trap, despite how enticing it might seem to hope for the best.
Short supply chains offer better security in the immediate and long term
Supply chains have come under deep focus and scrutiny thanks to the Covid-19 pandemic, with many companies and business models failing to deliver as a result of disruptions along extended chains. While at first China seemed like the epicenter, where most disruptions were occurring, that has proved a moving target, with Europe, then the United States, now Brazil (or back to the US?) each in turn bearing the brunt of the pandemic. This also means that we cannot just look at a given supply chain and hope it will be spared, regardless of its specific path; it is the length and complexity of the supply chain that puts the product at risk now. Furthermore, impacts may be delayed, go unnoticed at first, or appear suddenly as legislation and restrictions change. Even companies which have seemingly succeeded, like Amazon, in weathering or taking advantage of the crisis, are incurring huge cost increases behind the scenes from supply chain vulnerabilities and new Covid-19 related costs along its length, costs which will affect success and profit down the line.
How to avoid this trap: invest in companies with minimalist supply chains. In our globalized economy it is difficult but not impossible to find sectors whose actors do not require the work of others earlier up the line. Once again we invite you to think about mobile gaming. While ‘traditional’ video gaming is implicitly vulnerable at multiple points (console construction, purchases, e-sports tournaments even), mobile gaming is not. Their products are manufactured in house by developers, whose studios (like the LDRLY developer studio in Nanaimo which LEAF Mobile recently finalized the acquisition of) are ideally suited for distancing or working remotely. Yet their product is also sold entirely online, through app stores which can accomodate any number of mask-less customers. Perhaps this is why LEAF Mobile was able to launch it’s newest asset, the cannabis game Cheech and Chong Bud Farm on April 20th regardless of the state of the economy, without any supply chain induced weakness or delays. A strong example of why mobile gaming companies minimize supply chain distance and vulnerabilities, and why you should look into them and others like them for investment.
Avoid the tempting ‘steals’: keep long term income impacts in mind
Some stock peddlers are leaping at the chance to tell you to invest in companies whose stock crumpled in the initial period following the crash. With especially vulnerable sectors like airlines at all time lows, they whisper about what an opportunity it is, while Warren Buffet sells US$ 6 billion in airline stocks. Warren is thinking ahead. He knows that these industries will be incredibly slow to recover, and not just because people will drag their feet returning to travel. Companies will go under, reorganizing and structuring will be chaotic, and perhaps most importantly, incomes will have suffered tremendously.
What does this matter? With so many losing jobs or cutting back, especially here in the US, and people forced to burn through savings to cover rent or basic necessities. Industries, like the airlines, which depend on accessible disposable income and optimism to function, will be suffering for years. This means the ‘opportunistic’ buyers are not doing themselves any favors, and are likely to pay a high price for their risk, and those who are lucky enough not to, will have to wait a considerable period to see any gains.
What investors should be looking for are products and companies which deliver services that are largely income inelastic, or whose consumption might actually rise as people change their behaviour and adjust their long term spending patterns. Mobile gaming offers us an example: while their stocks have hardly plummeted, they have been made more accessible by the general slump, yet their products and profitability do not suffer from the same weaknesses. Mobile gaming companies like LEAF Mobile Inc rely instead on ads and the regular stream of microtransactions for revenue.
Mobile ads of course will be as important, or even more so, than before the crisis, as companies seek out new ways to target consumers who are staying home glued to their screens. Microtransactions are the quintessential income inelastic spending: based largely on habit formation and incremental small units to encourage spending. While they have previously captured the wealth of only a small section of the consumption base, they also provide a form of affordable entertainment when individuals are turning away from expensive or riskier ones. And it shows, despite the trending cut-backs in consumer spending across the board, Leaf Mobile Inc was among the many mobile gaming companies announcing record revenue numbers this spring.
Ultimately your investment choices are your own, and some risk is unavoidable, some desirable. By steering clear of these three pervasive pitfalls of the current market, however, you better your chances for positive pay-off in the long term. While you might want to look at sectors beyond mobile gaming, keep their example in mind and look for companies with similar strengths to Leaf Mobile Inc: short supply chains, uninflated values or expectations, and clear road to revenue in the short and long term.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
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