UK stock market investment ideas for 2021: Part 2 – The trend is their friend

In the second of our three-part series on UK stock market investment ideas for 2021, our focus will be on companies that directly benefited from trends either set in motion or accelerated by this year’s Covid-19 pandemic. And while these companies have already been boosted by some of the changes to public life and consumer behaviour that have resulted from the unique circumstances of 2020, we don’t expect these gains to be undone as life returns to normal.

With some of the star stocks of 2020, there is a strong suspicion gains may have been overdone. A few that spring to mind are U.S. tech stocks like Zoom Video Communications, boosted by a surge in video conferencing with many of us working from home, and electric car company Tesla. The latter looks more like a classic bubble driven by small private investors suffering from FOMO.

But there are others that have done reasonably well in 2020 but still look like having plenty of upside, thanks to the tailwinds from new and accelerated trends set to continue, either indefinitely or for a while yet. It’s those that we’ll focus on here.

And like the foreword to part one of this series of articles, we’ll also take the opportunity to remind that the UK stocks highlighted here are ‘ideas’ to be further researched. And with the strong appreciation things may not turn out as anticipated for all of them. Which is exactly why a broad, balanced portfolio that spreads risk is a vital element to long term investment success.

Successful investors know very well there will be both positive and negative outcomes for their stock picks. But that good research of company fundamentals and external trends and factors should mean that over the long term there will be more winners than losers. And that is a solid foundation for long term returns.

This is a small selection of London-listed stocks, and one from North America, that have had a good 2020, but still appear to have strong prospects and upside ahead into next year and beyond. We’ll kick off with the lone interloper from across the pond.

Shopify

An acceleration of the trend towards ecommerce taking an ever growing share of retail sector turnover was one big outcome of 2020. That’s seen the ecommerce colossus that is Amazon see its value rocket by over 70% this year to almost $1.6 trillion.

Many, with some justification, complain that the sheer size and online dominance Amazon has now achieved is stifling competition. In the USA the behemoth sweeps up almost half of all ecommerce spend. A scary statistic, and the company keeps growing and moving into new ecommerce sectors such as groceries and pharmaceuticals.

But we’re not here to talk about Amazon. Instead, the focus is on the one ecommerce company many sector analysts believe has a vaguely realistic chance of challenging it in years to come. That company is Shopify, the Canadian ecommerce platform that lets any company set up an online store.

Listed on the NYSE, with a $146 billion valuation, Shopify is becoming a giant in its own right (though still in a very different league to Amazon). But its business model is very different. Shopify is a technology platform that enables small ecommerce companies to take advantage of cutting-edge technology to set up their own independent operation, in exchange for a small cut of their gross revenue.

Shopify’s revenues leapt by over 100% year-on-year over the three months to the end of September, coming in at $767 million. And it’s now profitable, banking $191 million over the same quarter, compared to a $72 million loss for the same period a year earlier. And there’s plenty of growth potential still to come. The company has added a credit facility that could be very profitable with a ‘buy now, pay  later’ button and has launched its own warehouse fulfilment service that will allow it to take a bigger cut from the online retailers that are its customers.

With a share price of $1225.5 meaning Shopify’s value to forward sales ration is around x30, double they typical x15 of other SaaS (software as a service) companies, the company’s stock is not cheap by any traditional metrics. But as an enabler of smaller ecommerce operations, allowing them to compete with Amazon on a slightly more level playing field, the opportunity, and potential upside, is huge.

Pearson

Arguably still best known as a book publisher (it was once the largest in the world), specialising in educational titles, Pearson has, in recent years, been reinventing itself as an edutech company. Its reputation as a traditional publisher meant its valuation was for many years dragged down by negative perceptions of the print publishing sector.  But that’s starting to change.

Markets are starting to wake up to the fact that only around 25% of Person’s business is now print publishing. The other 75%, focused on education tools with a strong tech element, looks set for significant growth.

Overall, the Pearson share price hasn’t had a phenomenal 2020, though its 7% return on where it closed 2019 is more than solid with a few days of the year left. But it has recovered very strongly indeed from a mid-May low - up over 60% since.

And much of Pearson’s business now focuses on the big growth sector of online education. The subscription-based software model that has proven so lucrative for so many companies is something Pearson is moving strongly towards in school and parent-encouraged home education. Universities and businesses are also contributing to the online learning revolution.

Activist investor Cevian has already spotted the potential in Pearson, with the Swedish investment vehicle building up an 8.5% ownership stake. A combination of investor appetite for all things ‘tech’, and the fact the edutech space is still less developed than many others, means Pearson should be a stock with a bright future over the next several years. It could also quite possibly become an acquisition target.

Pets at Home

Lockdown Britain embraced pet ownership like never before this year. We’ve always been a nation of animal lovers but the work-from-home necessity, expected to continue for many to a greater or less extent even after the pandemic, convinced many to take the plunge with a new furry friend.

And pet ownership ratios are expected to stay higher in coming years, with new companions for life, not just lockdown. As a result, Pets at Home had a very good 2020. Considered ‘essential’ due to selling pet food as well as everything else pet owners buy, stores stayed open all year and did very well.

October saw interim results published and a 14.6% rise in pre-tax profits and 5.1% growth in overall sales beat analyst expectations. The company also took advantage of its strong position to acquire The Vet Connection for £15 million in November. The virtual pet health consultancy business is seen as an astute addition to the business.

The Pets at Home share price is already up just under 30% this year. And while the business’s upside may be more modest than the potential of some of the technology companies on this list, many analysts are confident there is strong growth still to come.

PureTech

A biotechnology company, PureTech has listing in both London, where it is a member of the FTSE 250, and Nasdaq over on Wall Street.

PureTech is developing a Covid-19 treatment, but not a vaccine. Instead, it is working on a long Covid therapy to treat lung fibrosis, which analysts see a lot of potential in, hence the 57.05% leap in its value since early November.

The company also has an interesting business model in which it founds new biotech start-ups focused on developing, a commercialising, a particular therapy or group of therapies, and spins them out early as stand-alone companies. This allows it to share the risk with other investors, while usually retaining part ownership and royalty rights. One such PureTech spin-out, Karuna, is already a public company in its own right.

Still with a relatively modest £1 billion valuation, PureTech’s long Covid treatment and diversified business model mean it could have very good growth potential left over 2021 and well beyond.

In Part 3 of this series we’ll sweep up with an assortment of five further ideas for investors in 2021, without a focus on any particular grouping, such as positive momentum and bounce back potential.