I like to identify the hardest-hit companies and sectors each year. It’s a useful exercise in value investing and a test of whether I would own the market’s most out-of-favour stocks.

I’ve been doing a similar exercise with Covid. Who has been hardest hit during the pandemic and who will unleash the largest response when lockdowns finally end?

The same answer keeps emerging: teenagers. They’re towards the end of the vaccine queue and arguably most affected by lockdowns, home schooling and time away from friends.

I feel bad for teenagers who are stuck on screens during and after school hours. They should be out doing what teenagers do, not stuck at home for months because of restrictions.

It’s hard to imagine how tough it must be for some teenagers who mostly see their friends on screen these days, having had their routine turned upside down by Covid.

But every problem is an opportunity. When Freedom Day finally arrives in NSW and Victoria, let’s hope teenagers make up for lost time (within reason).

With reopening plays, brokers usually focus on companies that will benefit when restrictions lift. Another approach is focusing on demographics. If one assumes teenagers will storm back to their favourite stores, which companies will benefit most?

I see three main types of spending. The first is necessity. I shudder at the thought of back-to-school expenses next year. Like most teenagers, mine have grown a lot during Covid and will need new sports shoes, clothes and other equipment when competitions resume.

Rebel, part of Super Retail Group, should have a cracking 12 months when kids’ sport returns in Victoria and NSW. Event Holdings should do well as teenagers return to cinemas (assuming we get a few blockbusters that draw big crowds). Kathmandu Holdings should benefit if older teenagers and twentysomethings start to travel again and buy clothes for their adventure.

However, the best way to play an expected recovery in teenager spending is through retailers focused on this segment. If you’re a parent who has teenagers, ask: “Will my kids spend more when lockdowns end and what will be the first things they buy?” There’s your answer.

Here are 3 stocks that will benefit from an expected strong recovery in spending by teenagers when Covid lockdowns end, particularly in Victoria and NSW.

1. Universal Store Holdings (UNI)

The retailer of casual-wear for teenagers listed on ASX through a $278-million Initial Public Offering in November 2020. Universal has barely missed a beat during its maiden year as a listed company, its shares rallying from a $3.80 offer price to $7.72.

Universal sells domestic, international and company-labelled brands for the youth market. Think jeans, sweatshirts, caps and other items that people my age should never wear. Universal’s target market is aged 16 to 35.

Universal has three attractions:

1. First, the company should benefit from a strong recovery in in-store spending by teenagers when lockdown restrictions end. I can imagine its stores will be full of young people looking to upgrade their wardrobe as they mix with friends again.
2. Second, Universal can continue to grow organically through a store rollout that has a long way to run. The business has performed well during the pandemic, achieving record sales results. That’s always a good sign when management can pivot a business in a crisis.
3. Valuation is the third factor. At $7.49, Universal is on a trailing Price Earnings (PE) multiple of about 16 times. The company has not given guidance because of Covid uncertainty. That PE appeals, given Universal’s growth prospects next year.

Also, the stock has traded sideways since May, possibly because of some IPO-related selling. When that selling abates, Universal’s rally should continue next year.

Share-price gains might be slower from here, but there’s a lot to like about Universal.

 Chart 1: Universal Store Holdings

Source: ASX

2. Lovisa Holdings (LOV)

The retailer of disposable fashion jewellery is a natural for teenagers. Some I know love nothing more than buying cheap Lovisa earrings or other jewellery for their outfit.

Lovisa has starred. The stock’s one-year total return (including dividends) is 135%. From a 52-week low of $7.13, Lovisa has soared to $19.08.

The mistake is anchoring one’s investment expectations to Lovisa’s share-price chart. Or believing it’s too late to buy, given the extent of Lovisa’s rally.

Granted, the $2-billion valuation is factoring in a lot of growth. But Lovisa is delivering. In fact, it’s becoming one of Australia’s great international retailing success stories.

Lovisa grew revenue by 19% in FY21. After-tax profit jumped 43%. The company added 109 stores to its 544-store network – a remarkable achievement in a pandemic. Strong sales growth in its 63 US stores is a good sign. It suggests a similar trend here when lockdowns end.

Almost three-quarters of Lovisa stores are now offshore. In many markets, Lovisa still has only a handful of shops, suggesting huge scope for store rollouts, particularly in Europe.

I’ve outlined a favourable view on Lovisa several times for this report over the years. My view has not changed. Lovisa’s budget jewellery clearly resonates with teenagers and twentysomething women – and disposable jewellery is a strong growth market.

Value investors might watch and wait for some steam to come out of Lovisa after its recent share-price rally. But owning a retailer with genuine global growth prospects is appealing, given the limited size of this market for Lovisa.

Chart 2: Lovisa

Source: ASX

3. Accent Group (AX1)

After performing strongly in the past 18 months, shares in the shoe retailer have come under pressure. From a 52-week low of $3.08, Accent has fallen to $2.08.

Some broking firms reduced their valuation and recommendation for Accent this year, amid Covid lockdowns and the effect on its store sales and supply chain. Accent shares fell in the lead-up to the company’s FY21 result and have lost more ground since then.

Accent owns The Athlete’s Foot, CAT, Merrill, Sketchers, Hype DC and other brands – a tough market when stores in NSW and Victoria are shuttered due to Covid restrictions.

Accent announced a 20% increase in revenue and 39% in after-tax profit for FY21. The full-year dividend rose 2 cents to 11.25. The business opened 90 stores and had record sales of $1.1 billion. That’s not bad during a pandemic when a big chunk of your market is stuck at home.

Accent said lockdowns in July and August will strip about $15 million more from its earnings than management expected before the latest restrictions. Like-for-like store sales were down 16% in the first seven weeks of FY22.That explains much of the recent fall in Accent, which was coming off a large rally from the March 2020 lows.

But every stock has its price. At $2.08, Accent is on a trailing PE of about 15 times. The company has not given guidance for FY22. After its recent fall, Accent is approaching value territory.

It could go lower, given Covid uncertainty. Technical analysts will want to see Accent stay above $2 – a key point on its chart. Accent is almost back to its level just before the pandemic erupted, even though it is a stronger business than it was in early 2020.

Accent has many short-term challenges. But I can’t help think teenagers will flock to its stores when restrictions ease. And that older customers like me will visit The Athlete’s Foot to buy new runners, having worn out a few pairs walking during Covid!

Chart 3: Accent Group (AXI)

Source: ASX

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at Sept 15, 2021.