Is Berkshire Hathaway a Good Investment?
The stock market has taken a big hit with the double whammy of the coronavirus pandemic and an oil price war between Saudi Arabia and Russia. Considering that things could get even more difficult before they get better, we wrote recently about safe investments for a ten year recession. In general, we stick to general principles for investing in stocks and only mention individual investments as examples. However, there is one investment opportunity in the current market mess that we believe is worth looking at. Warren Buffett’s company has been stockpiling cash for a couple of years and has the wherewithal to make major purchases at this time of low prices. Is Berkshire Hathaway a good investment?
Is Berkshire Hathaway a Good Investment?
We have often used Warren Buffett and his company as an example of the use of intrinsic stock value as a guide to profitable investing. And, we mentioned his so-called silent warning for investors in that he was stockpiling cash because he did not find any stocks that fit his criteria in an overpriced market. Now we see that The Motley Fool is suggesting the dirt cheap Warren Buffett stock as a current investment opportunity.
The reason I like Berkshire now is the reason why so many investors have hated it recently. The insurance giant has a cash hoard that’s unparalleled, and the coronavirus crash has given Buffett the chance to deploy that money in any of a host of smart ways. Crisis situations like this are what make Buffett stand apart from the crowd. It’s been a long wait, and the amount of cash on Berkshire’s balance sheet weighed on performance during the bull market. Now, though, Berkshire shareholders are likely to get their comeuppance.Yet because Berkshire’s been out of favor, it trades at bargain prices.
Those with long enough memories will recall that Buffett also got out of the market, built up his cash reserve, and waited during the run up to the dot com crash. His comment was that the market did not make any sense.
Individual stocks that comprise the bulk of the Berkshire Hathaway portfolio include Apple, Coca Cola, and a collection of financials including Bank of American, S. Bancorp, American Express, JP Morgan Chase, and Wells Fargo. All of these have taken hits in recent weeks but all or solid investments that will likely reward anyone who buys them at depressed prices and holds them for the long term.
However, the major argument for choosing Berkshire Hathaway itself is that you get Buffett’s expertise and that of his associates such as Charlie Munger. These old guys have been around for decades, tend to anticipate situations like we are in now and routinely walk away with long term profits.
Although there are and will be numerous investment opportunities during this market crash and in the months and years to come, we have to agree with The Motley Fool that picking Berkshire Hathaway Class A or Class B shares and holding on is probably one of the better stock investing options today.
Safe Investments for a Ten Year Recession
As the coronavirus continues to spread and claim lives across the world, the markets have plummeted and people in the “informal economies” of the world are without work or food. As we wrote in our article, How Far Could Stocks Fall, we reminded our readers that the stock market crash that started in 1929 did not end until 90% of market value was gone three years later. The economy was further damaged by an ill-advised trade war (Smoot Hawley Tariff) and the evaporation of credit. Historians may decide in years to come that the lessons learned in countering the Great Recession were crucial in dealing with the Coronavirus Recession or Depression.
How Long Will the Coronavirus Recession Last?
The New York Times writes that the recession caused by the virus could be much worse and longer lasting that any have so far expected. The problem is not just that world is steeped in debt and equities have been overpriced but that in order to stop the spread and damage of the virus the world simply needs to shut down!
The pandemic is above all a public health emergency. So long as human interaction remains dangerous, business cannot responsibly return to normal. And what was normal before may not be anymore.
People may be less inclined to jam into crowded restaurants and concert halls even after the virus is contained.
The abrupt halt of commercial activity threatens to impose economic pain so profound and enduring in every region of the world at once that recovery could take years. The losses to companies, many already saturated with debt, risk triggering a financial crisis of cataclysmic proportions.
“I feel like the 2008 financial crisis was just a dry run for this,” said Kenneth S. Rogoff, a Harvard economist and co-author of a history of financial crises, “This Time Is Different: Eight Centuries of Financial Folly.
They go on to say that the problems will be worse in the developing world where credit and investments have suffered in the last year.
Investors live with the hope that as the crisis of infections and death recedes, such a huge degree of pent up demand will emerge that economies will recover quickly.
Unfortunately, many businesses will be out of money as will consumers. Bankruptcies will common and many that do not simply go under will not have the resources to ramp up quickly. This crisis will affect buying habits, social activities, and risk tolerance for at least a generation to come.
Safe Investments for a Ten Year Recession
What can an investor do if the recession is going to last a decade or more? We recently wrote about dividend stocks to weather the market slump. But, are these or any other investments sufficient to weather the storm that is here, building, and due to last for a long time?
Secure Investments for a Recession
Investopedia writes about the standard portfolio investment strategy for the recession.
The key to investing before, during, and after a recession is to keep an eye on the big picture, rather than trying to time your way in and out of various market sectors, niches, and individual stocks. Even though there is a lot of historical evidence for the cyclical nature of certain investments during recessions, the fact of the matter is that timing such cycles is beyond the scope of the retail investor.
Investing in companies that sell consumer goods is always a good idea because food, cleaning products, and even beer are the last things that people will quit spending on when times get tough. Companies that support the infrastructure like utilities also have steady income and are likely to be bailed out in hard times.
Investments for a Recovery
Although we believe that the recession will be longer and deeper than many have feared, we also agree that there will be a recovery. Those companies that survive intact and have the assets to ramp up production as well as R&D will do the best. And, companies like Amazon.com with its home delivery system will likely be well positioned to take over more of the retail sector.
Companies with the Most Cash on Hand
24/7 Wall Street lists the American companies with the most cash.
- Microsoft: $136 billion
- Berkshire Hathaway: $128 billion
- Alphabet (Google): $121 billion
- Apple: $106 billion
- Facebook: $53 billion
- Amazon.com: $43 billion
- Ford: $37 billion
- Oracle: $35 billion
- Cisco: $33 billion
- Bristol-Meyers Squibb: $32 billion
These companies are likely to survive an extended recession intact and be positioned to grow during the eventual recovery.
Mobilize to Save the Economy
Everyone is rightfully scared right now. A deadly virus is spreading across the world, killing people, and devastating whole societies and economies. Despite being slow to react, governments across the globe are enacting social distancing measures to slow the spread and impact of the virus and struggling to get needed medical equipment before current supplies run out. With so many people in the USA living paycheck to paycheck and people across the world living day to day, the necessary shutdown of many businesses threatens to have devastating consequences. We wrote recently about how far stocks could fall and noted that the stock market crash that started in 1929 continued for three years and wiped out 90% of the Dow. The U.S. economy did not recover until mobilization for World War II. What we need to do today as well is mobilize to save the economy.
Mobilize to Save the Economy
The New York Times writes that the expected stimulus bill will not be enough to keep the economy from collapsing.
When the stock market crashed in 1929, the Dow plummeted from its September peak of 381.17 to a low of 41.22 in July 1932. Because so few Americans owned stocks, it took three years for the financial collapse to cycle though the rest of the economy. Unemployment only gradually increased, to a peak of about 25 percent in early 1933. Gross domestic product fell steadily, ultimately declining by about 30 percent.
The economic crash caused by the coronavirus, if anything, will be sharper and steeper. If we set out to deliberately destroy an economy, requesting most people to stay home is a very effective way. The virus itself is disrupting production, but the necessary public health response to the virus is economically catastrophic – and if government doesn’t act massively to offset the damage, the collapse will worsen.
We agree with what they say in that the economy is likely to fall faster and farther now than in the early 1930s. The fact is that all of the jobs programs of the 1930s only provided partial relief. If the government institutes half measures now they will be wasting trillions of dollars and accomplishing less than they could.
USA has outsourced too much of its work, skills, and basic abilities. The American workforce can create masks and ventilators to keep hospitals supplied but they may well need a cash infusion, now, to get started. But, if the government is going to be dumping trillions of dollars into relief efforts, the best place to put the money is into infrastructure projects. Business Insider quotes the American Society of Civil Engineers who say that the USA needs trillions to repair and beef up infrastructure. This sort of investment would put needed money into the economy, create jobs, teach skills, and give people a greater sense of purpose than they have doing things like temp jobs in food service.
The payoff of such an approach would be support for the economy now, a faster recovery, and a more efficient and more competitive America for the future.
Investing in Potential Coronavirus Treatments
When the coronavirus epidemic started to spread we wrote about investing in pharmaceuticals and the coronavirus. We noted that a vaccine is a long way off and that a better short term investment strategy would be invest in companies that make hand sanitizers, general cleaners, masks, and other immediately necessary items. While it will take some time (12-18 months) to devise and produce a vaccine, medicines to treat people with coronavirus could be available sooner. Such medicines would not make the pandemic go away but they would alleviate suffering and reduce the number of deaths from this modern day plague.
What Sorts of Treatments Are Possible?
Modern science has found several possible ways to treat and cure Covid-19. Some are in the research pipeline and others are already-existing drugs that are being tested to see if they help. These include medicines used for years to prevent and treat malaria and a medicine originally developed (but not successful) to treat Ebola but which has been found useful for SARS.
Flu Drugs
Fujifilm Toyama Chemical (Japan) is testing Favipirar (Avigan). This drug has been used to treat mild cases of influenza and was approved in Japan for experimental treatment of Covid-19 cases. News reports from Wuhan, China say it is “safe and effective” although these results are not replicated elsewhere. The drug blocks viruses from replicating and reports indicate that it shortens the course of the disease, especially in those with pulmonary complications. There are no results available in studies in peer-reviewed journals.
Old Drugs for Malaria
For decades doctors have prescribed chloroquine or hydroxychloroquine for prophylaxis when people visit malaria-infested parts of the world. The drugs are also used in higher doses to treat active cases. Additional uses of these drugs include treatment for rheumatoid arthritis and lupus. Lab evidence from cells of humans and other primates suggests the drugs could help treat Covid-19. The evidence is based on a 2005 study of SARS in which the drugs impeded replication of the virus. Dr. Fauci of the National Institute of Allergy and Infectious Disease stated on a CNN interview that the drugs are being tested on Covid-19 cases at the Nebraska Medical Center. He noted that there have to be controlled studies of safety, effectiveness, and useable dosage in order to advise doctors to start using these drugs in all Covid-19 cases.
Additionally, the University of Minnesota is looking at the use of hydroxychloroquine for individuals who are living with infected people to see if (as with the use of the drug for malaria) it helps keep folks from catching the disease when exposed.
Years ago in France, doctors looked at using hydroxychloroquine with and without the antibiotic azithromycin for SARS patients. They reported that levels of the SARS coronavirus fell faster when hydroxychloroquine was used and even faster when azithromycin was added. Unfortunately, the doctors did not include in their report whether or not people recovered faster (or at all). A concern with this drug combination is that it can be lethal for people with kidney failure and can interact with other drugs and cause heart rhythm problems.
Remdesvir, the Drug That Did Not Work for Ebola
Gilead Sciences developed a drug during the Ebola outbreak. It did not help Ebola but did slow the growth of SARS and the similar MERS viruses. In the lab this drug prevents the viruses from infecting human cells. (Published in a February 2020 issue of Nature)
The FDA has approved its use for “compassionate use” in severe cases of Covid-19. It is under study both in the USA and China in five separate clinical trials to see if it can shorten the course of the disease and cut down on complications.
The World Health Organization has stated that this is the only drug that currently shows tangible promise. Anecdotal evidence of rapid recoveries is promising but the true picture will only emerge once controlled studies are done.
Side effects of this drug can include nausea, vomiting, rectal bleeding, and liver enzyme elevation.
HIV Drugs Don’t Seem to Help
There was hope that an antiviral combination used to treat HIV (lopinavir and ritonavir = kaleta) would help. However, the New England Journal of Medicine just published (March 18, 2020) a study from China showing no benefit.
More studies are underway.
Medication to Reduce Inflammation
Death from Covid-19 is often the result of a so-called “cytokine storm.” Cytokines are part of your immune system and help fight infections. Unfortunately, in severe cases of Covid-19 the body produces too many and they cause damage to the lungs.
Doctors have used an immunosuppressant drug (tocilzumag=Actemra) in trying to block this effect. The drug is normally used for both adult and juvenile forms of rheumatoid arthritis. It works by binding to a cytokine called IL-6 or interleukin 6. Trials have just stared sponsored by Roche to see if treatment outcomes are improved when adding this drug to standard treatments.
In a similar approach, Regeneron is working with and testing the IL-6 inhibitor sarilumab or kevzara.
Blood Pressure Drugs to Treat (or worsen) Covid-19
The blood pressure drug, Losartan, is being studied at the University of Minnesota to see if 1) it can prevent multi-organ failure in Covid-19 and even the need to be hospitalized.
The drug blocks receptors in a manner that prevents blood pressure from going up. Because SARS binds to the same receptors the thinking is that the drug may help.
The downside the blood pressure idea is that use of these drugs could end up causing the body to produce more receptors and make it easier for Covid-19 to get into human cells. Of 355 Italian patients who died of Covid-19, three-fourths had hypertension. The authors of the study in this case were concerned that the use of this sort of drug could be dangerous in cases of Covid-19!
Other Possible Treatments
Almost a century ago doctors took the serum of patients who had recovered from infectious diseases and used the antibodies they had produced to treat other patients. This approach is possible today using monoclonal antibodies. Today it is not necessary to collect serum for every bit of antibody as antibodies can be produced in the lab.
There is a long but informative article in Wired about the use of this approach.
While drugs to treat this disease (except perhaps hydroxychloroquine) will not prevent the disease, they will make people better faster and reduce the fatality rate.
Dividend Stocks to Weather the Market Slump
The stock market continues its downward course as many fear just how far stocks could fall. Interest rates could possibly fall below zero. Meanwhile, there are dividend stocks to weather the market slump.
Dividend Stocks to Weather the Market Slump
An article on The Motley Fool caught our eye. They note that well-managed, well-placed businesses with solid balance sheets will be an ideal refuge during the prolonged market slump. They, in fact, recommend three high-yield dividend stocks.
COVID-19 cases are steadily increasing in the U.S., and states are taking drastic action. California recently placed its nearly 40 million residents under orders to stay home. This is going to have immense repercussions on the economy, and many businesses will struggle to stay afloat.
But not every business is going to be in trouble. There are a handful of companies that provide critical services we rely on across any environment, and others that continue to be in demand, even when consumer demand falls off a cliff.
If you’re looking for a source of security during the 2020 coronavirus recession, here are three stocks that pay high dividend yields that should prove safe and dependable even if things deteriorate in the months to come: Brookfield Infrastructure Partners (NYSE:BIP), NextEra Energy Partners (NYSE:NEP), and Verizon Communications (NYSE:VZ).
Their argument is that each of these companies has businesses that provide critical services and will continue to make money even in a deteriorating economy.
Brookfield has diversified holdings across the world in water, telecommunications, energy, and transportation. NextEra owns and operates facilities that produce renewable energy which they sell to power companies. Verizon has excellent cash reserves and has recently paid down their debt. Stock prices for each of these companies have fallen making their dividends increasingly attractive in the 4.5% to 6% range.
Dividends versus Interest-bearing Investments
If you already hold US Treasuries or corporate bonds with decent interest rates you can continue to collect your interest or sell at a premium if you need the cash. When interest rates go down, dividend stocks usually go up in price. Today rates are down and so are many dividend stocks. You may choose to stick with US Treasuries and accept a near-zero return or you can buy well-chosen dividend stocks to weather the market slump. But, rather than jumping to buy the first stock tip that you see online, make certain when investing in stocks to do your own homework.
The advantage of buying stocks like the ones that The Motley Fool suggests is that you can hold them for the long term as they have strong business models and are well-placed for the future. As the market continues to fall, many stocks will be pulled down with it but not all of them will suffer all that much as the recession and perhaps depression sets in. And, despite current fears, the virus will run its course as all infections do. “Herd immunity” will take place in that the majority of the population will have mild cases and will have immunity. This will slow and then stop the spread of the disease. Choose your investments wisely today and enjoy the profits for a long, long time.
How Will Negative Interest Rates Affect Your Investing?
The U.S. Federal Reserve has slashed already-low interest rates to zero. They are taking other measures to preserve credit and pump money back into the system. But, the steady spread of the coronavirus and predictions of 20% unemployment and worse are unsettling markets as investors wonder how far stocks will fall. As the economy contracts we will see the possibility of interest rates going below zero. How will negative interest rates affect your investing?
How Will Negative Interest Rates Affect Your Investing?
Forbes wrote a useful article a year ago about the damage negative interest rates would do to money market investments. The bottom line of their long discussion is that safe investments will no longer be safe. In our article about how to invest without losing any money, we looked at bonds, CDs, and money in the bank. The usual rationale is that you accept a moderate to low interest rate and forego the opportunity to make a lot of money.
But, your capital is always safe.
But, if interest rates go negative, you will be paying the bank for the privilege of parking your money with them. Either you will have to keep paying monthly for your deposits or they will simply deduct from the balance until your investment is gone!
Stock Investments When Rates Are Negative
Investopedia has an informative piece about the stock market and interest rates.
When the Fed changes interest rates, it affects markets in both direct and indirect ways as borrowing becomes more or less costly for individuals and businesses.
The stock market’s reaction to interest rate changes is generally immediate, however the real economy takes about a year to see any widespread effect.
Higher rates tend to negatively affect earnings and stock prices, with the exception of the financial sector – and vice-versa.
While the effects of interest rates have a delayed effect on things like the housing market, the stock market reacts immediately because the stock market predicts the future and adjusts.
In general, lower interest rates are good for business because companies can borrow money at lower rates and pay back more comfortably. The prospect of negative rates means that a company could get a low and also get routine “reverse” interest rate payments.
But, since banks will have to pay you money in order to loan you money, they may be resistant to lending, especially to the sort of “zombie companies” we mentioned in our article about whether debt will destroy your investment portfolio.
What Should You Do?
The folks at Yahoo Finance interviewed Warren Buffett in regard to negative interest rates.
First, Buffett conceded that in general the bond market with its super low rates, and wildly swinging yield curve, “is really crazy.” But then he made it clear that neither he nor his partner Charlie Munger have any expertise or any interest in predicting where interest rates are headed.
“Charlie and I focus on what’s knowable and important,” he said. “Now, interest rates are important, but we don’t think they’re knowable.”
This gets us to our usual starting point, intrinsic stock value. This is all happening because the economy and corporate earnings are being hit hard by the coronavirus and the prospect of a depression and financial collapse. For an investing perspective, what companies will weather the storm? It will be those with a combination of continued earnings and low debt. The point is that companies that already owe money will still need to pay off their debts with lower income. The beer companies, folks like Coca Cola, and Clorox will likely do just fine. Tesla might be in trouble with its huge debt but Amazon’s large debt burden may shrink as the company gets even busier making home deliveries during the ongoing crisis.
How Could Debt Destroy Your Investment Portfolio?
Despite Presidential assurances to the contrary, the coronavirus is taking hold in the USA as well as everywhere else in the world. The stock market has tanked and one question is how far stocks will fall. The other is if this will be so bad that it leads to an economic collapse. A major factor today that puts your investments at risk is the high level of corporate debt. How could debt destroy your investments?
How Could Debt Destroy Your Investments?
Despite the Fed buying treasuries and reducing interest rates to nearly zero, the market is still scared. The reason is the combination of a slowdown caused by the virus and huge levels of debt. In this regard, The New York Times writes about how the coronavirus will destroy the economy.
Though the Federal Reserve moved over the weekend to slash rates and buy treasuries, markets around the world fell on Monday anyway. The coronavirus threatens to set off financial contagion in a world economy with very different vulnerabilities than on the eve of the global financial crisis, 12 years ago.
In key ways, the world is now as or more deeply in debt as it was when the last big crisis hit. But the largest and most risky pools of debt have shifted – from households and banks in the United States, which were restrained by regulators after the crisis, to corporations all over the world.
Profits, or at least cash flow, are what have been keeping the market going up. The prospect of national economies screeching to a halt has investors worried about cash flow drying up. But, for many companies, the risk is going out of business. They point out that there are way too many “zombie” companies that are already having trouble coping with their payments. Those in the travel, entertainment, or restaurant sectors are facing a prolonged period of little or no income.
While the problem in 2008 came from household debt and banks, the issue today is companies across the globe that have taken on huge amounts of debt and will not be able to make payments. As many as sixteen percent of US companies fit this description as do ten percent of companies in Europe and China. Companies that went private in order to reduce their exposure to post-2008 regulations are at special risk as many took on lots of debt to buy out shareholders.
How about Stocks like Tesla and Amazon.com?
While we would not be surprised to see companies in the oil and natural gas sector go belly up due to the virus and oil price war, how about market leaders and stars like Amazon.com and Tesla? While Amazon.com may sell more things online during coronavirus dictated lockdowns Tesla does not have this option.
If there end up being massive government bailouts, who will get the money? If credit is shorn up, who gets help paying their debts? For that matter, if they go to negative interest rates, how will that play out with your portfolio?
Investors will be wise to look at the debt levels of the companies in their portfolios and cull out stocks in sectors likely to be weak in the near term and whose debt burdens are excessive.
How Far Could Stocks Fall?
The twin shocks of the coronavirus and the oil price war have hit the market hard. How far could stocks fall? With the possibility of more market weakness in mind, we look back at the 1929 stock market crash leading up to the Great Depression for indications of what is to come.
The Stock Market Crash that Ended the “Roaring Twenties” Stock Market
The 1929 stock market crash that ushered in the Great Depression was not a one day event and was not confined to October of 1929. There was a 10% correction of the market in March of 1929. And, the market came down 30% from its former high during the month of September. Then the market had three terrible days on Black Thursday, Black Monday, and Black Tuesday. On Black Thursday the market fell 9% before it rallied to “only” a 2% loss. In fact, the market recovered on Friday. But, on Black Monday it fell 12.6% followed by another 11.7% loss the next day, Black Tuesday.
Although the Dow fell more than 22% during the “Black” days, it continued to slide and have significant bad days for the next three years! The Dow Jones Industrial Average stood at 305 as the market opened on Black Thursday and by July of 1932 it was down to 41.22 for an 89.2% loss from its early September high of 381.17.
The stock market had been appreciating at about 20% a year during the 1920s and buying on margin was very popular a “playing the market” always seemed to be a good thing. In was, in fact, after the end of the market slide that Benjamin Graham introduced the concept of intrinsic stock value.
Lessons from Previous Stock Market Corrections and Crashes
To the extent that a market is overbought and overpriced, there will be a substantial correction and then a relatively prompt recovery. To the extent that there are underlying problems as well (such as those of the housing crisis in 2008) the effects will be worse and the recovery slower. The two prime examples are the dot com crash and the 2008 crash. The other aspect to watch is that the market prices in expectations. Now that investors are expecting worse days ahead, they are selling and driving prices down. When they start to see a brighter future, the market will rise ahead of the conditions of the day. Investing in stocks always has to do with predicting the short and long term future.
The Value of Perspective in Investing
The old saying is that there is never anything new as everything has happened before. With that thought in mind, we read about Warren Buffett’s comments about the double whammy of the coronavirus and oil price war.
According to Market Watch, Buffett is less concerned now than in 2008.
“If you stick around long enough, you’ll see everything in markets,” he said from his Omaha headquarters. “And it may have taken me to 89 years of age to throw this one into the experience, but the markets, if you have to be open second by second, they react to news in a big time way.”
While it may have been scarier in 1987 and 2008, at least to Buffett, there’s no denying that it’s been a brutal stretch for investors. On Monday, the Dow Jones Industrial Average DJIA, -4.896% dropped more than 2,000 points before recouping a chunk of those losses on Tuesday.
Of course, as we noted in our article about Buffett’s silent warning for investors, he is sitting on about $120 billion in cash and waiting for prices to come down to where he will start to buy.
The points we would like to make are these. The slide of the market could be longer and more severe than many could ever imagine. And, there is always a recovery once the bloodletting has ceased. Those who preserve enough cash to invest once the market has bottomed out will find excellent values that will reward them for years to come.
Can You Benefit from the Oil Price War?
Stocks are nearly in a bear market as defined by a 20% drop in prices over the last month. The 7% fall on Monday, March 9, puts it on the list of worst one-day performances along with a whole bunch that led into the Great Depression and more-recent Great Recession. The aging bull market was already in trouble because of the economic effects of the coronavirus, but now the Saudi’s have slashed prices and started an oil price war. Our question is, how can you benefit from the oil price war aside from being able to fill up your gas tank for less and paying less for heating your home?
Why Is There an Oil Price War?
Over the last several months, OPEC representatives led by Saudi Arabia have been negotiating with Russia for an agreement to cut back on production from all oil and natural gas suppliers. The idea was that this would keep prices up even as global demand fell due to the coronavirus’s effects on the global economy and on China in particular. Russia never budged. In the end, Saudi Arabia refused to cut back its own production and rather decided to ramp up production while cutting prices in an attempt to cut into Russia’s share of the oil market. Neither nation is in a particularly strong economic position these days which makes the Russian foot-dragging and Saudi decision to cut prices an economic game of “chicken.”
How Can You Benefit from the Oil Price War?
As an investor, what can you do? Oil and natural gas companies with strong economic reserves will survive, making this a good time to buy for the long term. Getting out of companies with weak balance sheets, even at a loss, may be what you need to do to avoid further investing “bloodshed” as the virus, price war, and economic downturn play out.
Vox has a few useful ideas about companies benefiting from the coronavirus.
Predicting what people will do as more and more “lock downs” occur across the world or people simply avoid going out and mixing with crowds much as possible. Netflix stock has fallen a few percent, but the stock is trading at what it sold for a year ago and substantially above last fall. The point is that that when people stay at home they get bored and having entertainment will make time go faster. Netflix and similar streaming services may do OK.
Clorox is on a tear. It is trading at an all-time high as everyone is stocking up on cleansers in advance of the arrival of the virus in their area. Companies that sell soap and cleaners, like P&G, are good ideas. P&G has slipped a bit but is now trading at its price for last July.
Even Campbell’s is doing well as people stock up on food that will last (like canned soup) during a prolonged, enforced quarantine. Campbell Soup Company is off a few percent today as we write this, but it is up about 15% since a couple of months ago and more like 60% from last year!
Sitting on Cash and Buying Later
Last August we wrote about the silent warning for investors from Warren Buffett who was accumulating cash and not buying much. His rationale was that stocks were universally overpriced and nothing met his criteria for intrinsic stock value and other reasons for investing in stock.
If you have some cash on hand, it might be an excellent time to sit on it for now as you watch for opportunities in companies with good long term potential but which are being taken down in the current rush to sell.
Is Now the Time to Invest?
The long awaited market correction has happened. Is now the time to invest or will the coronavirus wreck more havoc on the world economy, the stock market, and your own portfolio? Is the silent warning for investors to hold on to cash still valid, or are their bargain investments today? How do you assess intrinsic stock value and pick the best stocks to invest in when there is still so much uncertainty? Here a few suggestions that we gleaned from the internet.
Invest in Disney for Cheap and for the Long Term
The Motley Fool writes that Disney stock may never be this low again. We wrote about why to buy and hold Disney just last year. Our argument was that the company is a fixture for family entertainment with its theme parks, huge cash of content and emerging online, streaming presence. The article echoes this sentiment and notes that while the stock has taken a hit as the coronavirus has forced closure of many theme parks, that will not last forever, and the remainder of its money-making potential remains not only intact but steadily growing.
Among the stocks that tumbled was Walt Disney (NYSE:DIS). The usually stable entertainment giant is down 14% since Feb. 21, and has fallen more than 20% from its all-time high in November. For a reliable profit machine like Disney, that’s a substantial decline.
It’s easy to see why the stock has fallen, though. All three of its theme parks in Asia are now closed. Much of its resorts business remains threatened by the coronavirus outbreak, which hammered the travel and tourism industries, and investors are also nervous after the surprise announcement that CEO Bob Iger was stepping down.
However, Disney stock is starting to look unreasonably cheap as investors seem to have forgotten about the positive catalysts that drove it to a record just a few months ago.
They go on to detail their reasons for believing that Disney is ripe for purchase and that we may be seeing a historically low price. There are and will be more bargains than Disney before this is over. Picking companies that will weather the storm and have excellent long term prospects is the key.
What Are Insiders Buying on the Downturn?
A good place to look for bargain stocks is companies whose executives start buying their own stock when the market falls. Market Watch details nine such instances.
Because they see their own businesses daily, company executives are suggesting through their actions that fears about the hit to economic growth because of COVID-19 are overdone. They’ve stepped up buying their own companies’ shares, and in all the right sectors.
- Six Flags Entertainment
- Cedar Fair
- Delta Air Lines
- Allegiant Travel
- Kinder Morgan
- Energy Transfer
- Enterprise Products Partners
- Huntsman
- Trinity Industries
These are a mixed group but the common feature is that the companies have been hit by reduced travel, lower energy consumption, and other factors related to the coronavirus scare. We wrote a short piece about who will survive the coronavirus pandemic. These may well be companies to add to your shopping list.
As always, do your own research and fundamental analysis before adding any investments to your portfolio.