Morningstar - Q4 2020 - 47

platforms. As smaller players exit the specialty
coffee and casual dining categories, we
see meaningful market share gains for many
of the larger incumbents.
This trend has not been lost on investors.
Darden Restaurants DRI, whose core brands are
Olive Garden, LongHorn, and Cheddar's Scratch
Kitchen, briefly traded at a 5-star rating in
March. But it quickly recovered and is trading near
our fair value estimate, placing it firmly within
3-star range. However, we still see opportunities
for restaurants that possess the scale to be
aggressive on pricing, provide customers robust
digital ordering, delivery, and drive-thru
capabilities, and have healthy balance sheets.
Two 4-star-rated companies that fit this bill include
Restaurant Brands International QSR, a quickservice chain that includes Tim Hortons,
Burger King, and Popeyes Louisiana Kitchen, and
Yum Brands YUM, which operates KFC, Pizza
Hut, and Taco Bell.

We Expect a Vaccine in the First Half of 2021
Although behavioral changes and more
widespread testing have helped limit transmission
of the coronavirus, and improved standard
of care and therapeutics have curbed the fatality
rate, none of these strategies can end the
pandemic without a vaccine.
Fortunately, numerous vaccines are under
development and in late-stage testing, and we
expect broad availability next year. For several of
the vaccines, we think early-stage data is
promising and that the duration of the efficacy
for a vaccine would be at least one year.
Based on the early results, we expect the U.S.
Food and Drug Administration could award

gFood and other household staples, which
skyrocketed in the early days of the pandemic
as people loaded up their pantries and
cautious consumers were wary of going
into stores.
gElectronic and technological infrastructure,
reflecting the needs of employees who were
suddenly forced to work from home.
gSupplies for home improvement projects, lawn
and garden, and home entertainment, which
increased as consumers stuck at home had the
time to pursue tasks around the house.

Acceleration of E-Commerce: Final Nail in
Physical Stores?
Online sales were already a rapidly growing
proportion of retail sales, but the trend accelerated
as many consumers quarantined at home
or found themselves staring at closed signs at
their favorite stores.

From February through August, nonstore retailers
had realized a 21% increase in sales, while
overall retail sales increased 4% ( E X H I BI T 6 ). Top
areas of online consumer spending included:

Like the work-from-home trend, increased
digital consumer spending contributed to the
surging valuations among the largest, most
well-known household names in the tech sector.
Alphabet, Amazon.com AMZN, Apple AAPL,
Facebook FB, Microsoft, and Netflix NFLX rose on
average 42% this year through Sept. 30. The
market capitalization of these six stocks accounted
for almost 20% of the overall Morningstar US
Market Index, whereas a year ago they only
accounted for 14% of the index. At the end of the
third quarter, 39% of stocks in the technology
sector had 1- or 2-star ratings, indicating that we
thought they were overvalued.

three emergency-use authorizations for frontline healthcare workers and high-risk people for
Moderna MRNA, Pfizer/BioNTech PFE/BNTX,
and AstraZeneca/Oxford AZN by the end of
2020 or in early 2021. Assuming the data remains
positive, vaccine production and distribution
would be ramped up enough to be able
to supply the remaining population during the
first half of 2021.
If a high percentage of people in the U.S. get
vaccinated, we think the country can achieve
herd immunity by the second half of 2021, largely
due to vaccination, not infection.

During the initial rush to buy online, Amazon.com
and eBay EBAY captured the preponderance
of sales. We raised their fair value estimates by
52% and 37%, respectively, this year. However,
even their systems and distribution chains became
overwhelmed by the volume of purchases.
This led consumers to try other online services-
benefiting retailers such as Walmart WMT,
Target TGT, and Best Buy BBY, which have been
investing in their online platforms and
refining their digital engagement over the past
few years.
After this initial wave for household staples and
business supplies, companies such as Home
Depot HD and Lowe's LOW were the beneficiaries
of the focus on household projects and
realized 20% or more same-store sales growth
earlier this year. Both companies' stocks surged;
however, we caution investors that we think
sales will return to normal once the pandemic
subsides. As such, we think that at current
levels, both stocks are trading significantly above
their fair value.
The intensification of online retail sales emphasized
what retailers with physical stores will need

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