Dryden Pence Talks Online Holiday Sales Growth in 2020

What’s your outlook for 2021?

I think it’s a constructive one. There will be some volatility early in the year, but as we get to the point where everyone has either had COVID or has obtained a vaccine, we’re confident the economy will continue to grow. Most expectations have a GDP growth rate north of 3%. So, I think that’s positive towards the economy and the markets in general.

I’ll emphasize, though, during the first part of the year, we’re going to be volatile. COVID is roaring back, and we’re not sure how that and the resulting shutdowns will affect everything. It’s certainly affected the hospitality and leisure sector. But, again, the second half of the year should be fairly solid due to an expanded stimulus and COVID recovery. So, overall, on the year, we’re pretty constructive.

Tell me a little bit about the big picture — why you think e-commerce can continue to be strong.

People have gone through forced adaptation due to COVID. If you weren’t shopping online before, you are now – and they’re not necessarily going to go back. I think there’s a permanent change in how people conduct retail activities. There’s also the office space issue; as companies allow people to work from home, we find people relocating across the country.

This e-commerce phenomenon is going to become standard operating procedure for most households. So, where we were doing maybe 10-11% of retail trade, on e-commerce, it’s gone up to 16-17%; at Christmas, around 25%. Then, however, you think about China and other places, where the baseline is around 25% – so I think we have a lot of room for increased e-commerce activity.

The major beneficiaries will be companies like Amazon, Visa, Mastercard. Those are the places you’ll see grow – and then, Shopify, as the enabler for so many people to get into the business. We see this phenomenon having long legs and becoming common practice for households. That’s how we do a tremendous amount of retail activity.

Would you own Amazon OR Shopify, or own both because they are a little different from each other in what they do?

They are different, and we have both of them in certain portfolios. Certainly, Shopify is a newer player, and that’s one that people might be a little aggressive with — everyone should talk to their own financial advisor, of course. The point is, though, that both of them are somewhat essential in being able to put things on e-commerce or execute the purchase. So they both have a chunk of that market, and we see good long-term growth for both.

There’s a shopping behavior chart that shows how many people tried a shopping method and different brands, and it showed that 77-78% planned to continue with those trends. There’s a big shift to online for over-the-counter medicines, snacks, alcohol, personal care products, household supplies. I’m surprised you’re not out there recommending some of those different sectors. Why is it that you’re picking what you are picking?

We tend to focus on what we call choke points — things essential to executing the satisfaction of human desires. It doesn’t matter necessarily what product you’re buying; you still have to do it on a platform. You still have to pay for it with some sort of electronic payment processing. Rather than picking what the consumer is going to buy, we focus on points in the supply chain — rather than selecting a particular type of detergent, food, or something like that.

When you take a look at the low-interest-rate environment — which is likely to stick around – we saw the ten-year go above 1%, and maybe we’ll drift higher, but this is a low-rate environment. So, are you generally bullish on the S&P 500 when you look at PE ratios? I know you’re looking at this low-interest rate support, expansion, and multiples. Tell me more about that.

When you basically have zero or close to zero risk-free rates of return, the opportunity cost for the risks is there. You can price things up at present value — we move forward to higher PE ratios, and very low-interest rate environments can support a higher PE ratio. So, when people think about “My gosh, the market might be overpriced at this point.” We think that may not necessarily always be true. With the low-interest-rate environment, the feds will keep it there for a while — with the stimulus on top of that. We think that the market can support that higher PE in the S&P. That’s part of our positive outlook there. We don’t think that the market is tremendously overpriced; across all levels, sectors are certainly out of whack in some places. In general, though, the interest rate environment can support a higher PE on stocks when looking at the strategy.

You use the phrase “out of whack” for some things that really may be in a bubble, overpriced, or “frothy.” What, exactly, comes to mind?

You have to take a look at each sector. When I say something’s out of whack, it’s almost from the inverse side; you see some companies that have a lower PE, when — in actuality — if you take a look at Apple (via some of the other sectors), it may even be in a situation where it has a lower PE than some of them. That tells you either we have some strength in that holding, or other companies run ahead of it.

So everyone’s got to talk to their own advisor. However, when you look at everything across the board, you can see that some of these pricings could be more sustainable than people think. If they’re trying to run calculations on risk-free rates of return when everything is at zero, you can price most things at present value. That’s going to account for the higher PE ratios, which makes it acceptable. Then, you’ll still see some sectors really impacted until we get past the COVID issue.