COVID-19 turned much of the business world on its head thanks to numerous severe restrictions that changed the way billions of people lived their daily lives. One of the clearest illustrations of this was the flight from office space towards remote work conditions, often in the form of “work from home.”
This dynamic produced a massive tailwind for companies positioned to profit from increased remote work, including video communications technology company Zoom Video Communications (ZM), freelance marketplace company Fiverr International (FVRR), and telemedicine company Teladoc Health (TDOC). As people became less likely to meet in person, especially in more densely crowded office buildings, the use of technology platforms that facilitated remote collaboration spiked.
However, with the worst of COVID-19 increasingly appearing to be behind us – even the U.S. Congress convened for the latest State of The Union address mask-less and without social distancing policies in place – the trend could be reversing soon. Many companies have worked out hybrid situations thus far, but in the coming months companies should be moving increasingly towards being in the office full-time. This would boost companies that profit from the return to the office and could provide opportunity for investors right now given that some of these stocks remain undervalued.
Billionaire Bruce Flatt Betting Big On The Return To The Office
One big name investor who oversees the allocation of hundreds of billions of dollars in capital as the CEO of Brookfield Asset Management (BAM) – billionaire Bruce Flatt – is betting heavily on the return to office trend.
Back in August 2020 at the height of the pandemic, BAM published research stating that offices will remain highly valued and heavily utilized by corporations as work efficiency is bolstered by in-person collaboration and supervision in ways that it couldn’t be remotely. Between strengthening employee bonds through in-person interaction and the fact that communication and management is significantly smoother and more effective when done face-to-face, BAM believes the cost-benefit analysis of work from home against working in the office is clearly in favor of companies largely returning to the office in the vast majority of cases.
Bruce Flatt then reiterated BAM’s reasoning in June 2021 when he said:
They are all coming back to the office. It is just inevitable, but people have to do it in phases. They first thought they couldn’t come back. Then they thought they could partly work from home. Eventually, they will all be back in the office. We are seeing it everywhere in the world. We are also seeing it in cities that are reopening, but it is just happening slower in certain places.
In 2022, BAM has continued to double down on their bullish return to work thesis, investing $7 billion to acquire three large office REITs.
There is good reason for this continued bullishness, in May 2020, over 33% of U.S. workers were working from home and in March 2022, that number has declined to 10%, according to data from the Bureau of Labor Statistics.
Companies like Bank of America (BAC) and Goldman Sachs (GS) have recently announced that they are fully returning to the office and many others are likely to follow in their footsteps in the coming months. Microsoft (MSFT), Meta (FB), and Chevron (CVX) are other major companies that are expecting to return to full-time work in the office within the next year.
Our Top “Return To Office” Picks
With many major companies set to send their remaining remote employees back to the office in large numbers in the coming months, you would think that most “return to office” stocks would be back at normal prices, right? Well, in some cases, that is correct. For example, blue-chip office REIT Boston Properties (BXP) trades at close to its pre-COVID-19 levels as it has largely already priced in the return to office dynamic. BAM is also not particularly cheap at the moment, though it is overvalued either.
However, there are other companies that also profit from increased corporate demand for office services that are well-off highs. Our two favorites right now are Lumen Technologies (LUMN) and Cogent Communications (CCOI), two companies that provide internet access to companies among other communications services.
LUMN is investing aggressively in quantum fiber and edge computing infrastructure capabilities. Its enterprise business should benefit immensely from the return to work trend as demand for its communications infrastructure should increase substantially.
The stock is currently in the doldrums due to the fact that it is struggling to generate topline growth as its gradually declining legacy businesses combine with lingering COVID-19 headwinds to weigh down the company. That said, LUMN plans to offload a large chunk of its non-core assets in order to pay down billions of dollars in debt and refine its portfolio so that it can focus its CapEx on its growthiest assets.
Between the return to work trend in the wake of COVID-19 headwinds dissipating, the acceleration of the fourth industrial revolution (which should increase demand for LUMN’s network with its edge computing capabilities), its freshly refined portfolio, and its accelerated investments in growth businesses like quantum fiber, LUMN has a decent chance of meeting management’s guidance of returning to topline growth within a few years. In the meantime, it trades at a deep discount to market comps on an EV/EBITDA basis, pays out an 8.7% dividend yield, and is gushing free cash flow that could lead to further buybacks in the near future.
Once growth returns to the business, the stock could quite conceivably soar by 50% or more in a short period of time, making it a high upside potential stock. The main downside risk is that the company’s growth investments will disappoint and the company will eventually be put in a position where it has to cut its dividend in order to deleverage. However, in that scenario it is quite possible that the company would end up selling itself. In fact, management has alluded to its willingness to sell additional assets and businesses opportunistically moving forward, providing investors with another upside catalyst.
CCOI finds itself in a similar position. In fact, in a recent exclusive interview with CCOI’s CFO, he summed up the investment opportunity quite well to us, stating:
We are confident that we will be able to continue to grow and that as we do, the stock will go back up. Of course, the big debate in the marketplace today is when will the corporate business turn around. We believe that we are about to return to office, no doubt. However, if you don’t believe there’s going to be a return to the office or it’s going to be delayed, you’re going to have to look at this stock differently than someone who says over the next several quarters, it’s going to change.
Another advantage for CCOI is that it is highly focused with only one business: selling bidirectional internet service. On top of that, the capital allocation policy is extremely shareholder friendly with the company paying out as much as possible in its dividend and consistently growing it each quarter.
As the CFO stated in our interview with him:
Our commitment to not only paying a substantial dividend, but consistently growing that dividend each quarter, really forces us to create real discipline. You can’t just increase that dividend every year. The power of that compounded dividend forces us to remain focused on cutting costs and improving efficiencies. Nobody has a secretary at Cogent. My CEO flies coach out to Singapore. It is not a frivolous company that does dumb acquisitions or stuff that doesn’t make sense. It is a well-run company and it’s also a pretty simple story. I was a banker for a long time. I’ve met with many companies and candidly it’s an incredibly well-run company. The interests of shareholders and the management team are highly aligned. The largest individual shareholder is the Founder and CEO and our compensate is almost all in stock. So, we have every interest in making sure the stock performs and the dividend gets paid, which is really important.
Bruce Flatt has a phenomenal track record at BAM, as the company has absolutely crushed the S&P 500 (SPY) and Berkshire Hathaway (BRK.A)(BRK.B) under his tenure. Furthermore, BAM is one of the world’s largest real estate investors, right alongside fellow alternative asset management giant Blackstone (BX). Therefore, when Bruce Flatt makes a big bet on real estate, it is worth at least sitting up and taking notice.
While a lot of the opportunity in office real estate is already gone, there remains a substantial opportunity in communications businesses that stand to benefit significantly from the return to the office.
With both LUMN and CCOI trading much closer to 52-week lows than 52-week highs and looking at a strong tailwind in the coming quarters as workers return to the office en-masse, now looks like a great risk-adjusted time to invest in these high yielding stocks.