Stepping Back from the Noise

“And so I moved that very day into the heart of a quince, where the seeds are few and almost silent.” – Khalil Gibran, from the poem “The Pomegranate”

I was always taught that evolution is a slow process that occurs over generations.  The reality is that evolution can occur quickly.  A meteorite slams into the earth, smoke and debris deny plants of sunlight, and the dinosaurs begin to die as their food sources whither. Mammals emerge from their tunnels and thrive as they realize their former predators are quickly dying away. Any change in our external environment can lead to faster evolution as species do what it takes to survive.  Scientists have even shown[1] that a species can evolve in real time. 

Similarly, evolution does not always occur in a straight line. As a parent, one of the more interesting things I have learned is that a child does not grow on an even trajectory. The child will maintain the same size for a period of time and then, seemingly overnight, hit a growth spurt. Financial markets are similar, if you look at the hourly and daily fluctuations of the S&P 500 index, it appears wildly unstable as it zigs and zags seemingly unable to decide whether the day is happy or sad.  But if you step back from the noise and observe the long-term trend, the market appears much more stable as the daily movements average out. There is a direction. There is an evolution. 

For the financial and business markets, 9/11 and the 2008 Financial Crisis were both meteorites. The 2020 Covid-19 pandemic may, in hindsight, be the greatest meteorite of them all.  The way businesses operate is changing in real time, and they will change even more. The pandemic is not putting us on a new path. It is advancing and accelerating trends that were already taking form.  

While the dot-com bubble was fueled by the excitement and promises of the Internet, it wasn’t until years after that the emergence of high-speed broadband, efficient supply chain/logistics systems (FedEx, UPS), advances in computer processing, and supercomputers in the pocket of every human being allowed these promises to be fulfilled. The world has become flatter, communication across geographies has become seamless, and people have over 1,200 petabytes of data always available at their fingertips.  This Cambrian Explosion[2] of new ecosystems emerging from The Information Age is counterbalanced by the demise of business models that have failed to adapt. 

Retail Pain

Sectors within the retail industry are currently experiencing acute pain. We started the year with more than 1,000 malls in the U.S.  A widely cited 2017 Credit Suisse report identified America as having more indoor shopping space than any other country in the world. We had over 23.5 square foot per person compared to the next highest (Canada and Australia) which supported 16.4 and 11.1 square foot per person. The study predicted that up to 25% of American malls could close before 2023. Covid has accelerated this prediction. Through August of this year, 27 retailers[3] (representing more than 6,000 store closures) have filed for bankruptcy. This surpasses the 22 total retail bankruptcy filings in 2019, and is on pace to compete with the 48 retailers that filed in 2010 on the tail end of the Financial Crisis.  

In our July 2017 letter[4], I outlined my views on the future of retail. This included smaller footprint stores, limited inventory (strictly for sizing), and purchases being drop shipped instantaneously with customer payments. The traditional malls and retail outlets we are familiar with were not designed for the Internet Age. The digital first retailers are now overtaking the incumbents. 

Brands Selling Direct

The pandemic has given brands extra motivation to sell directly to their customers. Major brands such as Nike have pivoted away from selling through department stores. Nike recently announced that it is cutting ties with some of its legacy partners (Dillard’s, Belk, Boscov’s, and Fred Meyer) which collectively represent almost 1,000 physical stores. Additionally, they are shedding many of their retail outlets which were anchored within malls.  Nike is focused on reclaiming their brand and inventory with an intent to emphasize their digital presence. In their most recent quarter, Nike digital sales increased 75% even as overall revenue declined 38%.

Nike is far from the only brand pursuing this path, and the cascading implications for department stores will be devastating. The more brands shift away from the department store model, the better they can establish direct connections with the end consumer. Minus the middle-man, each sale becomes more profitable and brands gain invaluable data on customer buying habits. 

Much of this was inevitable.  Covid accelerated evolution.

More bankruptcies are around the corner.  If the 2020 holiday shopping season does not reflect a bonanza of pent up shopping demand, cash flow for retailers will falter.  Having racked up debt during the peak of the pandemic and lacking the funds for restructuring, many will immediately move to a Chapter 7 bankruptcy (liquidation).  Even those determined to push forward may hit a wall early next year when landlords ask for catch up payments on rent that was deferred through 2020.  


Prior to the pandemic, there were rumblings that the restaurant market was already oversaturated. With industry experts pointing to rising labor and food costs, weak sales, changing consumer tastes and loyalties, a shrinking middle class, and declines in mall traffic.  Oversaturation typically leads to a squeeze in the middle.  Consumers are driven by either “experience” or “convenience”. The middle, “fast casual dining” (Appleby’s, Ruby Tuesday, Outback, etc.), gets suffocated.   

Even in the best of times, restaurants operate on tight budgets. With Covid shutdowns and then 25% capacity limitations, many restaurants will be forced to close their doors permanently.  It’s already happening in New York City[5]and Texas[6]

Empty Buildings

Retail and restaurant closures point to another danger zone: commercial real estate. What will the landlords do with the vacant space? Including the announced bankruptcies and consolidations, retailers have announced the closing of 130 million square feet of retail space[7].  

Non-retail businesses are also likely to reduce their footprint.  Most of us have realized that our work locations will be changing.  While we may be more efficient working from home, I know that I frequently miss the human interaction of the office environment. I won’t be doing this forever.  A hybrid blend of dispersed and optimized office locations, and “work from home days” will likely be the norm.  The best of both worlds with less time commuting.  

What are the long-term implications?

The “mammals” (survivors) of this pandemic are many and the technology sector is the driver.  Whether it is advanced Point-of-Sale systems from Par Technology (PAR) that empower restaurant chains to support majority drive through, take-out, or delivery business. Or if it is an advertising marketplace like The Trade Desk (TTD) which enables brands to more effectively target and reach their ideal customers, technology is the answer. Our equity portfolios largely reflect this view.  

Companies didn’t imagine they could operate effectively with remote workers. Now, they realize that remote work capability will be essential for business resilience and continuity. The lasting impacts of this trend are expansive.  If employers are no longer limited to hiring within commuting distance but can instead find a great employee in a lower cost geography (or even internationally), the employer benefits but the employee can expect lower wages and salary stagnation. The longer-term trend points to wider income inequality. Those with jobs that can be done effectively from the comfort of their home will continue to benefit. Jobs furloughed in travel, transportation, entertainment, leisure, hospitality and food service may disappear permanently.  Factory and warehouse work will be replaced with automation. Robots don’t require health insurance or paternity leave, nor do they fall prey to pandemics. Minorities and the less educated will be disproportionately impacted. Or said better, those least able to withstand prolonged joblessness will be the ones most severely setback.  We were already on this track, but the meteorite…

Households with financial assets and white-collar jobs have actually benefitted from the economic downturn.  The value of homes and stock portfolios have reached all-time highs, while blue collar workers and small business owners are experiencing unprecedent job losses and business closures. This is the definition of a “K-shaped” recovery.

Many will point to the stock market rebound as a sign of a strong underlying economy.  This is an optical illusion. The stock market boom is the result of a low interest rate environment where investors have few alternatives to seek investment returns. Additionally, the Federal Reserve has stuffed more money into the market in the form of $3 Trillion in liquidity and the promise of buying bonds from some of the largest publicly traded companies. These actions uphold prices. And don’t forget that interest rates are low, and the Fed is adding liquidity because…. the underlying economy is weak.  

K-shaped recovery. (source: US Chamber of Commerce)[8]

The challenge will be in protecting those hardest hit, and supporting viable companies to keep them afloat.  There is an air pocket in our economy and we should expect more turbulence ahead.  

Selected portfolio discussion:

For the third quarter of 2020, the RCG Alpha Long Short Fund gained 7% while the Alpha Strategy gained 13%. Our closest benchmarks, the Equity Long Short Index and the Russell 3000 gained 3% and 9% respectively. Our portfolios had another solid quarter of performance. We are invested in companies which we believe will continue to thrive and find opportunities through the crisis. We believe our business experience gives us an edge in identifying such investments, and we will continue to hunt for hidden gems. 

SolarEdge Technologies (SEDG – Up 66.8%) The smart energy technology company was our strongest performer during the quarter. The company reported strong second quarter earnings with flat revenue and 12% profit growth during the heart of the pandemic, both of which greatly exceeded market expectations.  Additionally, management provided strong Q3 guidance for the fall.  Solar Edge remains one of the best positioned in its respective markets with a diversified product portfolio in both commercial and residential solar power markets. 

Par Technology (PAR – Up 47.9%) Our hospitality software investment continues to gain momentum.  On the Q2 earnings call, management noted that 94% of their restaurant customers had reopened for business by the end of July.  Additionally, they believe that the pandemic has pulled forward restaurants’ adoption of cloud-based POS solutions by several years as the environment has made it clear that restaurants can’t compete without effective technology. At the beginning of October, PAR raised $125M+ through a public offering. With more cash on the balance sheet, the company is entering Q4 an even strong company with currency to accelerate the business or complete acquisitions.

The Trade Desk (TTD – Up 22.6%) A similar story with The Trade Desk: outperforming earnings expectations during the pandemic. Connected TV spending rose 40% in the quarter and management guided to an 80% increase in Q3.  TTD is believed to be a beneficiary of the Facebook ad boycott. Brands were wary of placing ads on Facebook and risking having their brands associated with hate speech.  

Abbott Labs (ABT – Up 15.1%) The pandemic continues to spread into new US locales, and Abbott Labs is well positioned (along with Roche and Danaher) to capture the bulk of the US market for COVID test kits.  ABT currently offers three COVID-19 tests: a lab-based test that detects the presence of the coronavirus, a rapid point-of-care test that also detects the presence of virus, and a lab-based blood test that detects IgG antibodies against the virus. During the quarter, the FDA granted emergency use authorization for the company’s 15-minute COVID-19 test that will be priced at just $5. The company expected to ship tens of millions of tests in September with a ramp to 50M tests by the end of October.  Management expects demand for COVID-19 diagnostics to remain robust.

Viemed Healthcare (VMD – Down 10.0%) Viemed was one of the very few detractors for the quarter. The respiratory healthcare services company reported revenue growth of over 110% from the year prior and profits increased over 300% partially due to Covid related respirator sales.  There was no truly negative news during the quarter. However, the company filed a mixed shelf offering at the beginning of September which will allow them to raise up to $100M in cash through a share offering. An offering of that magnitude would be heavily dilutive to existing shareholders, but it would not dampen our enthusiasm for our investment. 

As we head into the fourth quarter of 2020, I expect more noise and turbulence:

  • Will congress pass a much needed second stimulus package or will politics interfere?
  • Our Presidential election could not possibly be more concerning, confusing and in disarray.  Disputed and/or delayed election results will spark a Constitutional Crisis and will be infinitely destabilizing to the markets.
  • Completing a Supreme Court Justice appointment will create more partisanship and division.  In what other country are judges considered celebrities and worthy of this much political friction?

Rest assured, we are constantly monitoring all of the above activity and astutely assessing the impact on portfolios. However, we are also stepping back from the noise always focused on the long-term trends. If you are interested in joining us on our investment journey, please contact us at  


[2] The Cambrian Period is the time when most of the major groups of animals first appear in the fossil record. This event is sometimes called the “Cambrian Explosion,” because of the relatively short time over which this diversity of forms appears.







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