Order those pizza stocks as a hedge in these uncertain times

As the COVID-19 pandemic brought with it a financial crisis, there were all sorts of speculation on where one could park their cash. With low or negative interest rates, the natural course of action was to park money in gold, by both governments and investors, which also fed into the bonanza around investing in gold-backed Exchange Traded Funds (ETFs).

The alternative was taking part in the rush to invest in tech companies, including online platforms and cloud data companies. While there is a good long-term interest in such investments, the most recent hikes in prices of their stocks capture speculations that are targeted at making a quick buck - not an interest to buy-and-hold for the long-term.

Tuck into other options

Interestingly, little attention has been paid to what’s happening with stocks of other companies, such as those of pizza companies with delivery options. Pizza stocks listed on Nasdaq, like Domino’s and Papa John’s, registered sizable increases in their prices during the pandemic. This, apparently, was not solely the outcome of pizza stocks’ dividend pay-out, but also because they were able to expand operations and sales at a time when other dine-in options were suffering.

Though this is synonymous of what has been observed during other financial crises, from the Great Depression onwards, the trend itself has shifted because of COVID-19.

With the Great Depression and the 2008 financial crisis, people switched to low-end food and beverages (F&B) options because of the loss in income. Others opted for homemade meals as long as the main ingredients could be afforded at market prices.

In all cases, mobility here did not eliminate dine-in options altogether, and people had options as long as they could afford them. The same cannot be said with COVID-19, and it is not about affordability alone.

Mobility is a factor

Granted that governments have embarked on varying support schemes to protect jobs and keep unemployment rates at bay. But affordability did not take centrestage in the COVID-19 crisis as it did with preceding financial crises. Instead, mobility played a bigger role in determining which F&B businesses would survive the crisis... and which would not.

Thus, the surge in pizza stocks, like with other F&B businesses that either have their own delivery options or are doing it via third-parties, is totally justifiable. The dividend pay-out is the cherry on top, which is anyway the result of pizza companies being able to not only survive the crisis, but to thrive in it too.

So, does that mean that pizza stocks must be bought in anticipation of a financial crisis?

Most probably. But it must be noted that every crisis has its own circumstances that must be kept in mind. And in all cases, any stock must be analysed based on the company’s fundamentals, soundness of its operations and future expansion plans. In a nutshell, F&B businesses seem to do okay in financial crises. What sets them apart is price, mobility, and obviously demand for their products.

To conclude, the surge in pizza stocks’ prices follow a trend witnessed during other financial crises. What makes this one different, nevertheless, is the focus on stocks of companies that have vibrant delivery operations when compared to peers within the F&B sector.

This has fed into higher emphasis on not only the ability of pizza companies to weather the financial storm, but also their ability to maintain and expand operations when others, specifically ones without the delivery option, are suffering. Finally, it remains to be seen if the interest in pizza stocks will endure COVID-19 and its accompanying financial crisis.

The last thought that I want to leave you with: Are pizza stocks going to be the new hedge in financial crises?

- Abdulnasser Alshaali is a UAE based economist.