Eq: Value (66)
One interesting investing strategy (admittedly always for a small minority of a portfolio) is to look at the very worst stocks in the market for a contrarian bet. Of all the thousands of publicly traded and analyst-covered stocks, just 90 have no “Buy” ratings from a single analyst. Out of that down and out basket, there are three interesting stocks to consider; shares which could do well if the economic recovery even goes just a little bit right. The stocks are: Sally Beauty Holdings (beauty supplies to consumers and salons), Michaels (the arts and crafts store), and Blackbaud (a software provider to the non-profit space).
FINSUM: Of these, Michaels is moderately interesting because they just brought in a new senior executive from Walmart, which should help improve margins and store performance, which could lead to good multiple expansion.
The market has been highly topsy turvy lately. With no real direction, stocks have been swinging back and forth based on economic and COVID news from day to day. With this kind of market looking likely for the near term, Goldman laid out some of its best picks for this kind of environment. Speaking about the market generally, the bank said “Consensus expects 9% upside to the typical stock over the next 12 months and volatility should remain elevated through the rest of the year, suggesting low risk-adjusted returns in the coming months.” Its stock picks included: Merck, Verizon, Philip Morris, General Motors, Comcast, Mondelez, and Coca-Cola.
FINSUM: A lot of old blue chips here whose earnings aren’t likely to be hurt too much by COVID.
Airlines had a pretty good run headed into last week’s downturns. Other travel stocks did too. However, the markets really seem to have gotten ahead of themselves, because the big rallies appear to forget some fundamental changes that might be taking place under the COVID lockdown. While a knee-jerk rise in share prices alongside the lifting of lockdown orders might be logical on the surface, it ignores the fact that a great deal of domestic US travel is for business, and attitudes towards business travel have changed remarkably since March. Many companies have found remote work even more productive than office work, and no longer see the need for travel. Also, it is easier to cut travel budgets by 50% than it is to lay off more people.
FINSUM: We think there is going to be serious changes to the business travel paradigm that prevailed pre-COVID. It has now been demonstrated that similar levels of sales can be achieved by videoconference, and when you count the cost and time of travel, it is clear that companies are going to permanently cut budgets.
It has been a long, long, time since value stocks really had a shining moment. Growth has been outperforming value for over a decade now. However, strategists at JP Morgan say that value stocks may start to shine very soon. This underlying parts of this economy—weaker but still improving—are the exact conditions where value stocks traditionally shine. These pre-requisites for success seem likely to stay in place. There does not appear to be a second wave of infections brewing, there is ample government support for the economy, and economic data is trending more positively than negatively.
FINSUM: The typical rotation into value (such as in 2008-2009) takes over 100 days and has 18% upside. The logic here is sound, but we still wonder if value will outperform growth.
Morgan Stanley says the big gains in travel stocks are way overblown and will likely prove dangerous to investors. Carnival, Royal Caribbean, and Norwegian have all seen their shares rise in the double digits recently as investors have grown increasingly optimistic about their prospects and their cash reserves. However, Morgan Stanley threw cold water on those sentiments, saying “The cruise industry will take longer than almost any other form of travel to return to normal” as it downgraded the stocks to Underweight (two of them were already Underweight). UBS also pointed out that there will likely be no meaningful cruise activity until next year.
FINSUM: Even once cruises get running again, all it will take is one minor flourish of COVID—and the associated news cycle—for the whole sector to freeze up again. Too risky to invest in at this point.
The stock market may be complicated right now, but some things are abundantly clear. One of those is how the retail sector, and retail stocks in general, are going to react to the crisis. The answer is that big players are going to continue to grow, largely at the expense of smaller retailers. Bigger companies, with sophisticated websites and massive free shipping operations, have been thriving as small companies falter.
FINSUM: Think Amazon and Walmart, maybe Shopify (see other story about Shopify from today), as these companies will be the ones winning orders from customers over the short and long-term.
There has been a lot of gloom for the auto industry lately. With showrooms and dealerships almost completely shut, car buying has dropped off a cliff, leaving auto companies sitting on big inventories with little demand. However, early signs from China and Europe are showing that the lockdown may have led to pent up demand for cars. In one sense, there is natural pent up demand from the closure of dealerships, but more interestingly, there seems to be more demand than usual. This is because people are growingly afraid of public transportation—in some cases governments are warning against using public transit . This means people are seeking the relative safety of traveling in their own vehicles.
FINSUM: This idea of surplus demand for private vehicles because of fear of the virus makes perfect sense. Auto stocks undervalued?
The biggest aircraft maker in the country just put out a dire prediction (although not a surprising one)—that there will be a major airline bankruptcy this year. The airline industry has been wounded as never before, with demand falling more than 90% since this time last year. Most analysts think it will take until the end of year for demand to even rise to 50% of the year prior. Credit default swaps—a proxy for the odds a company will default—are very high right now. For instance, markets are putting a 54% chance that American Airlines defaults.
FINSUM: This is an odd comment from a company that is talking about its biggest clients. It speaks volumes.
Auto stocks have been wounded badly by the COVID lockdown. Car sales have plummeted as buyers do not go to dealerships, test drive etc. The future is not looking great either, as a long recession could crimp consumer spending and hit auto companies where it hurts most—on higher margin large vehicles (like SUVs). Interestingly though, a major Ford insider, COO Jim Farley, just picked up $1m of shares in the embattled company. It was his first open market purchase since at least 2007.
FINSUM: This is a really strong signal from a guy who has been with the company for some time.
If you have any hope for a quick airline recovery post-coronavirus, take that idea, crumple it into a little ball and throw it away. The reality of air travel’s recovery is looking bleaker by the week. On the one hand, additional safety measures are going to be necessity for a long time—and they will be costly. Extra screening, spacing out passengers etc all have significant costs. Additionally, many airlines will have to forego middle seating to create adequate distance between passengers, cutting down on capacity. All of this will come as demand for air travel remains low in the short-term and secularly weaker in the long-term. For instance, business travel for meetings, conferences etc all looks likely to be very slow to recover because companies don’t want to put their workers in harm’s way. Videoconferencing has also proven very effective.
FINSUM: There is likely to be a big clearing out of weaker airlines and several years of losses/less profit for larger ones.
So who is going to benefit most in the inevitable reopening of the economy? It is a tricky question to sort out. The most obvious companies are already seeing very stretched valuations, so those probably aren’t a good buy. Accordingly, here are some interesting names to look at in a category Goldman Sachs is calling “quality-at-a-reasonable-price”: Texas Instruments, Facebook, Mastercard, Alphabet, Home Depot, Ross Stores, Colgate-Palmolive.
FINSUM: Nice range of names. On the tech side, we love Facebook and Google. They are going to make more and more money as this lockdown accelerates the shift to ecommerce. On the retail side, discount stores like Ross seem like a good bet.
In a topic that wreaks of moral hazard, private equity firms are increasingly the beneficiaries of government bailout funds. The situation is similar to the Crisis-era bailout of Chrysler, which was owned by Cerberus Capital Management. The Financial Times summed up the situation best, saying “Should they use government money to support companies whose deep-pocketed private equity owners have often thinned out their balance sheets and left the slimmest financial cushion?”, continuing with a quote from a professor at Oxford, “We cannot have a world in which one can borrow to earn more and pay little taxes if things go up and when things go down then the taxpayer comes to the rescue”.
FINSUM: Private equity will probably get more bailout money as this lockdown rolls on, but the Democrats will surely attach a lot of strings to it.
The outlook for retail is bleak. Investors already know this, but separating those who might actually go bust from those who will muddle through is key. The US’ big stimulus package had little directly for retailers, but there is enough to throw them a lifeline. According to analysts 630,000 US retailers have had to shut their doors since Coronavrus erupted. Larger companies have responded by furloughing staff, delaying obligations, and tapping revolving credit lines. The retailers most at risk seem to be the mall-based chains that focus on clothing—who were already struggling against ecommerce. Think J.Crew, Neiman Marcus, other department stores etc.
FINSUM: Our team has considerable experience in retail, and in our view the coronavirus will be looked back on as the coffin nail in brick and mortar retail (especially for clothing). This lockdown is going to accelerate the shift to ecommerce, and brick and mortar shopping habits may be permanently reduced.
We have ben warning for weeks that as the coronavirus continued to spread, airline and other travel stocks would continue to be wounded (and likely not recover soon). That is happening n a big way today as news of a quarantine in Italy sent markets into a panic about the spread of the disease beyond China. Cruise ships and airline stocks are taking body blows as a result, with Delta and American down 7% and 10% respectively.
FINSUM: These are massive losses, and the worst part about it is that there is unlikely to be a “V” shaped recovery in these sectors, as it will take some time for the public’s fear of the virus (and thus travel) to wane even after things start to get better.