Uncertainty still surrounds the future of Covid-19 and various vaccines, but we’re already seeing clear differences in consumer and business behavior since the pandemic.
In our Large Cap Value Fund, the Viral Effects theme captures positions that we believe will benefit over the long term from these changes.
Although it was clear to us early in the pandemic which companies were directly benefitting in the short term (mask manufacturers come to mind), in this fund we look for companies that will be net beneficiaries when the dust settles — companies that can continue to grow because of long-lasting systemic changes.
As we’ve seen the re-opening of the economy, Disney and DraftKings have stand out as companies benefiting from the “new-normal.” Here’s why these positions are a great fit for the Large Cap Value Fund.
Over the long term, we believe Disney should be uniquely able to replicate what Netflix has accomplished with direct-to-consumer streaming services (Disney+/Star, Hulu, ESPN+)—namely, acquiring a massive subscriber base. In just a few years, it’s on track to surpass 300 million subscribers globally. It has also raised its monthly subscription fee in the United States and Europe while keeping a low price point relative to other streaming services with room for future increases.
In the near term, the reopening of Disney Parks in 2021 should provide additional improvements to financial performance.
DraftKings (DKNG) – We’ve added this new position to the portfolio based on anticipation that online sports betting will get the green light across nearly all U.S. states over the next two to four years. Some states need to close budget deficits, 21 states have already approved the gambling format, and nine other states are considering legistration to approve it.
We did significant research on the market opportunity for online sports betting and chose DraftKings because it is an asset-light, pure-play online gaming provider in the U.S. market. We’ll keep a close watch on longer-term variables, such as how U.S. market share ultimately shapes up and what the company’s normalized profitability and margins look like.
Our overarching conclusion so far is that sizeable market growth over the next few years, even without expansion to other states, should offer a strong tailwind to companies in this sector. A portion of the roughly $150 billion wagered illegally or offshore is likely to make its way to licensed domestic operators and digital platforms, we believe.
Active management makes the difference
Active management lets us respond dynamically to shifts in even the most unpredictable markets in ways that passive indexes cannot.
As the uncertainty of the pandemic gives way to increasing stability and reopening, we continue to look for themes and positions that we believe could offer the greatest potential for durable growth.
As of 12/31/20 DraftKings (DKNG) was 0.66% of total assets, and Disney (DIS) was 0.57% of total assets in Putnam Large Cap Value Fund.