Which Investments Will Survive the Coronavirus Pandemic?
Investors across the world have come to realize that the coronavirus is going to spread and that we will have a global pandemic. If you are not sure where to get your facts in this regard, we suggest reading an article published in The New York Times and written by the public health expert, Michael Osterholm.
It’s now clear that the epidemic was never going to be contained. At most, its spread was slowed by the lockdown imposed in China and other countries’ efforts to identify infected people and anyone they might have been in contact with.
The coronavirus that causes Covid-19 seems to spread like influenza, through the air, person to person. Unlike Ebola, SARS and MERS, it can be transmitted by individuals before the onset of symptoms or even if they don’t become ill. An infected person appears to spread the disease to an average of 2.6 people. After 10 generations of transmission, with each taking about five or six days, that one initial case has spawned more than 3,500, most with no or mild symptoms, yet probably infectious. The fact that mild cases are difficult to differentiate from colds or the flu only complicates the diagnosis.
The “take home lessons” from what this expert says are these:
- Covid-19 is going to end up spreading to every corner of the globe just like every new strain of influenza does
- The vast majority of people who contract this disease will have symptoms like a mild cold or almost nothing but will briefly carry and spread the virus.
- Unlike influenza, there is no vaccine
What scares a lot of people is that Covid-19 has a death rate substantially higher than seen with influenza. Like influenza, it is more dangerous for babies, the elderly, and those with complicating diseases.
The stock market has now caught on and is in a steady selloff.
Which Investments Will Survive the Coronavirus Pandemic?
In our article about investments for when the market falls, we noted the comments of Warren Buffett who says that he looks for stocks that work well with his long term investment horizon of twenty or thirty years. We also noted that in order to survive what may well be a global economic slowdown, stocks with a strong margin of safety in the form of low debt would be a good idea.
In this regard, the level of debt spread out across Chinese businesses coupled with the damage the infection is causing to industries far and wide, is of concern. Almost four years ago we were concerned about Chinese debt. The virus situation only compounds these worries.
Closer to home, companies like Tesla and Amazon.com both carry large amounts of debt but are forgiven by investors who expect to see continued extraordinary growth. What happens when that growth slows and reverses? This is more of a concern for Tesla than Amazon as Amazon’s sales could increase if people decide to stay home and avoid crowds while shopping!
Investments for When the Market Falls
Despite continual nay-saying, the bull market has continued on its course, driven by profits. Corporate earnings may be taking a nosedive as we see from the most recent quarterly projection from Apple. In fact, as the coronavirus takes hold in countries outside of China, there is concern of a global economic meltdown. The New York Times writes about the threat of a pandemic in Italy.
As Italy locked down 50,000 people in 10 towns to contain the first major coronavirus outbreak in Europe – and a fifth person there died from the virus – a growing nervousness pervaded the continent, with officials in nearby countries pledging to keep the outbreak from spreading further.
The virus is also affecting Milan, the country’s economic engine, though the city is not currently under quarantine. The stock market in Milan dropped more than 4 percent on Monday, and many tourist attractions, including the city’s famed cathedral, were closed.
Outbreaks in countries neighboring China have surprised no one but more cases and deaths in Iran and now in Europe threaten to drive the world into shutdown mode. Samsung has closed a factory in South Korea and many Chinese companies that are deep in debt are likely to collapse as the country remains largely in shutdown mode.
How Bad Will the Investment Scene Get?
Cramer of Mad Money thinks that the effects of the virus on companies will be more severe than thought.
“The virus is totally underrated,” Cramer said at the end of last week.
“What I think is a little too premature is they all presume that it is going to be solved within a foreseeable time frame,” he said Friday. “At what point do we say that many, many companies are going to be hurt by the virus [and] we’re paying too much for stocks?”
This is the sort of thinking that will lead to a big selloff.
Investments for When the Market Falls
Several months ago we wrote about Warren Buffet and his silent warning for investors. The Oracle of Omaha has been accumulating billions of dollars in cash as he and his crew do not see any investments with acceptable intrinsic stock value. In an interview on CNBC he reiterated his intention to invest in quality with time horizons of twenty and thirty years.
As the coronavirus outbreak sparks fears of a slowdown in global growth, Buffett closed the CNBC interview saying his long-term outlook remains unchanged.
“We’re buying businesses to own for 20 or 30 years. We buy them in whole, we buy them in part and we think the 20 and 30 year outlook is not changed by the coronavirus.”
You can try shorting stocks in anticipation of a market crash and run the risk of getting burned like in the recent Tesla short squeeze, or use Buffet’s long term approach for investing in stocks and consider the staying and earnings power of companies like Apple, your favorite banks, or anyone else with the capacity to grow earnings over the years. One thing we would like to add is that considering the likelihood of trouble because of the coronavirus, companies without a lot of debt and other margin of safety positives will be good idea in the near term.
Will Coronavirus Hurt Corporate Earnings?
The forced holiday that China has experienced due to the coronavirus has been compared to the entire US workforce taking a two month vacation! This means that China is producing less and that they are consuming less as well. Commodities suppliers will be hurt as they sell fewer raw materials to Chinese industry and foreign customers will not get the parts they need to do their own manufacturing. So, will the coronavirus hurt corporate earnings as it continues in China and spreads across the globe?
How Will the Coronavirus Affect the Stock Market?
CNN reports that Goldman Sachs is warning of a stock market correction. At the root of their concern is the combination of an overbought market and the threat to earnings posed by the Chinese coronavirus.
Stocks keep reaching record highs. Goldman Sachs is worried that leaves investors vulnerable to surprises.
The investment bank told clients this week that a near-term correction, in which the market slides at least 10% from a recent peak, “is looking much more probable.”
The thinking: Equity markets look “increasingly exposed” to disappointing earnings growth due to the new coronavirus outbreak, Goldman warns.
The number of companies that have lowered their guidance on profits for the first quarter is still in line with past years. But Apple’s surprise update this week that it wouldn’t hit its revenue target has put investors on edge.
The FANG stocks have been steadily climbing higher as they continually increase earnings. Investors are paying a premium for each of these stocks based on the expectation of continually higher value based on steady increases in earnings. When that turns out not to be the case, the correction could be impressive.
How Will the Coronavirus Hurt Corporate Earnings?
The concern about lower earnings is widespread. According to Forbes, more than 400 companies have projected lower earnings based on the effects of the virus.
Some 421 different companies, 394 of which are U.S.-based, have talked about the coronavirus on first quarter earnings calls.
These range from the likes of Starbucks, McDonald’s, Nike, and Apple to Yum Brands China which includes Pizza Hut, Taco Bell, and KFC. Luxury goods will be hurting as well according to Este Lauder, Capri Holdings, and LVMH.
The reasons include shutdowns in production due to the virus, reduced access to parts made in China, few raw materials purchased by China, and reduced purchases within China due to business shutdowns and reduced income.
Projections by Apple and others tell us that the effects of the virus on production, sales, and earning will spread far and wide before all of this is over.
What Should Investors Do about a Potential Market Correction?
This depends on whether you are a long term investor or make your money swing trading stocks. Those who are in the market for the short term may wish to pick stocks to short a few stocks. However, they will want to heed the lesson of Tesla and the Short Squeeze. Long term investors will do well to assess the intrinsic stock values within their holdings, only get rid of the weak ones now, and plan on investing in stocks with the highest intrinsic value when the market corrects.
Are Robotics Good Investments?
Automation has taken a toll on manufacturing in every corner of the globe. Light assembly jobs that took a hundred workers now require an automated assembly line working around the clock and now more than half a dozen workers. Investors are well aware of industries and economies hurt by automation. But, robotics has also created jobs and profitable companies. Are robotics good investments? Right now with the worldwide economy in the doldrums, this sector is lagging, but over the long term, robotics is, in fact, the wave of the future.
Investing in Robotics Stocks
Robotics Investing News writes about the seven top robotics stocks.
Spending in the USA on drones and robotics passed $100 billion a couple of years ago and is rising at close to 20% a year. These firms make two-thirds of their money selling robots or robotic equipment and the rest from software.
Here are the top seven (listed on exchanges in the USA) that they list alphabetically.
- Cognex
- FANUC
- iRobot
- KUKA
- Medtronic
- Rewalk Robotics
- Rockwell Automation
Each of these companies has its own niche. For example, Medtronic makes medical devices and their automation is aimed at manufacturing in the core market. The listing gives a snapshot of each company and the article has financial info.
Are Robotics Good Investments?
There are three main themes to concern yourself with when investing in robotics. The first is the industry for which the robotics or automation are intended and the second is how well run the company is. The third has to do with how inventive they are and good at keeping up with or staying ahead of the completion.
Today the biggest markets for robotics are the auto and electronics industries. Today, with the trade war and now the Chinese coronavirus, trade has slowed, sales are down, and robotics sales are suffering. But, over the longer term, this technology will find more and more uses, and will be a true wave of the future. Thus, you need to consider are robotics good investments for the long term when picking investments.
Intrinsic Stock Value of Robotics Investments
Is it better to invest in companies that make the robots or those that design and upgrade the software? Large companies like Siemens do both but many smaller concerns focus on one or the other. The bottom line here is that, aside from paying the programmers, there is a low overhead to creating and upgrading software while making new machines requires more money than a smaller company may have access to.
And, you can certainly invest in Siemens via an ADR to take advantage of their robotics and automation prowess, but that aspect of their business is only a fraction of what they do so that the effects of growing automation sales are diluted. Three billion euro in sales would be huge for a standalone robotics company but is only a portion of the pie for Siemens.
The winning companies in this long term race will be those that keep ahead of the pack in regard to automation technology and run their businesses efficiently in order to maintain their customer base and produce steady profits.
Beware of Coronavirus Investing Scams
It seems that every time there is some sort of threat to health, welfare, or your pocketbook, the scammers show up looking for ways to trick you out of your money. The most recent threat is the Chinese coronavirus. The disease is highly contagious, kills its victims at about ten times the rate of influenza cases, and does not seem to be under control at the source in East and Central China. While this is happening, investors are smart to consider investment risks and opportunities such as whether pharmaceutical stocks could be a good choice. In the meantime beware of coronavirus investing scams.
Beware of Coronavirus Investing Scams
In this regard, CNBC reports that both the Federal Trade Commission and the Securities and Exchange Commission have put out warnings about likely coronavirus scams.
If you’ve seen research reports or promotions touting opportunities to invest with companies that are working to cure coronavirus, think twice before buying stock shares.
This advice comes from the SEC, FTC, and even the Florida Department of Agriculture after an uptick in investor scams related to the virus.
“Fraudsters often use the latest news developments to lure investors into scams,” the SEC’s office of investor education and advocacy said in a Feb. 4 email.
As the Wuhan coronavirus dominates virtually every news cycle, everyone is worried about the spread of the disease and investors are on the lookout for defensive measures to take and potential investment opportunities. This is what the scammers are trying to take advantage of.
The SEC released its warning after it became aware of “a number of Internet promotions, including on social media, claiming that the products or services of publicly traded companies can prevent, detect or cure coronavirus, and that the stock of these companies will dramatically increase in value as a result.”
Investors Need to Beware of Fraudulent “Research Reports”
Investors on the lookout for investing opportunities related to the virus outbreak and spread naturally look for useful background information to use as part of their analysis of intrinsic stock value. This is a good approach when investing in stocks. The problem is that scammers are good at hyping a stock and doing it so smoothly that they appear to be offering genuine and accurate information. What is really happening is that they are typically running pump and dump schemes, especially with OTC stocks. Anyone who got sucked into the later stages of the Bitcoin pump and dump scheme and then losing their shirt knows how this works.
How Can Investors Avoid Being Scammed?
The old saying that if something appears too good to be true it is most likely too good to be true applies first and foremost. When we give advice to new investors we typically suggest that they stick with what they know. If you have a background in medicine, biology, infectious disease, or preventive medicine, you will probably have some useful insights into this situation. And, you will also know that there is no quick cure. Companies selling face masks and cleaning solutions will see upticks in sales but it can take years to develop a vaccine, especially for a brand new virus. And, many diseases for which scientists have tried to make vaccines have resisted any such solution.
If you have the appropriate background, you can read any “research reports” and spot the ones that are fraudulent. For example, when a report states that respected medical journals are reporting certain results, they should be citing the journals and the information needed to find the reports in question. Then you can go online and find the report for yourself. Statements by researchers without results that have been published in peer-reviewed journals should also be suspect. All too often, even scientists are looking for someone to back their research and will make such statements in attempts to get funding. This does not mean that they have a cure in sight.
The bottom line is that you need to beware of coronavirus scams as this disease spreads and causes havoc on the Chinese mainland, neighboring nations, and the world.
Is It Time to Sell Amazon?
A good way to know when to sell a stock that is about to correct is to watch what the insiders are doing with their stock. In this regard, is it time to sell Amazon? In just the last week or so Jeff Bezos has sold $3.5 billion dollars-worth of Amazon.com stock. Is this an indication that the boss of Amazon.com thinks that is a good time to start taking a profit because the stock is about tank? Or does he simply have so much money that $3.5 billion is pocket change?
Investing in Amazon.com
Amazon.com was founded in 1994 and has traded on NASDAQ since 1997 when it opened at $1.73 a share. During the years running up to the dot com bubble, Amazon.com was one of the few internet stocks that actually was making any money and was not based on hype and fluff. It peaked at $78 before the dot com bubble but fell to the $10 range after the crash. The stock gradually rose in value until it got to the $120 range before it began an almost exponential growth, arriving at $1952 a share in September of 2018. At that point it lost about a third of its value before recovering and then lost about a fourth before climbing to over $2,100 a share today.
The stock does not pay a dividend and has a P/E ratio of 92! All of its attraction lies in its growth prospects. Amazon.com today is the largest provider of AI assistance, cloud computing services, and online marketplace. The company has driven a huge swath of brick and mortar retailors out of business or into much smaller versions of their former selves. They have gone into movie production and online content streaming as well where they compete with Netflix and Disney. It is unlikely that the company will ever go away as it efficiently provides a whole range of valuable services and routinely out-competes all others. But, its growth curve is reminiscent of Microsoft before it corrected and flat-lined for years after the dot com crash. Thus the investment risk for Amazon.com is getting in today at $2,100 a share and seeing it fall to $1,500 only to stay there for a decade!
Jeff Bezos Has Other Investments than Amazon.com
Is it time to sell Amazon just because the largest shareholder decides to take less than 3% of his holdings? Bezos announced three years ago that he would be funding his space flight company, Blue Origin, to the tune of $1 billion a year and he may be planning another expected purchase like when he bought The Washington Post a few years ago. All of that having been said, Bezos has timed his sale at a high point for Amazon.com stock.
How Bad Is the Amazon.com Bubble?
CCN thinks that Amazon stock is in serious trouble. Their argument is that, unlike the other high-flying tech giants that have been driving the market higher, this stock has a hugely-inflated PE ratio and is due for a correction. The situation is similar to that with Tesla which recently benefited from a short squeeze as short sellers were forced to exit their positions and drive prices higher.
There are investors who firmly believe that Amazon is and will remain the wave of the future. But, the question in regard to intrinsic stock value of Amazon.com is just how many new businesses Bezos can grow under one umbrella and how long can he maintain thin profit margins before something breaks?
Investing and the Tesla Short Squeeze
Tesla is on a tear with the stock price up nearly three-fold in the last year. While some see this as a vindication of their faith in Tesla over the years, others see the most recent surge in Tesla’s stock price as a classic short squeeze. While Tesla has been going up, many traders have shorted the stock in expectations of a substantial correction. When that has not happened, they have had to buy the more-expensive shares to cover their positions, this has driven the stock price even higher. Here are our thoughts on investing and the Tesla short squeeze.
Investing and the Tesla Short Squeeze
In just a month Tesla stock has gone from $450 a share to $900 a share. For a stock that sold for $17 a share when it opened a decade ago, this is an impressive success story. Many who have invested in Tesla over the years firmly believe that electric cars are the future of the auto industry and that Tesla will be the leader. However, Tesla has rarely made a profit and carries about $13 billion in debts. They had severe production delays a couple of years ago which took the stock down from the $400 range to about $200 before it started to recover in light of meeting production quotas and eking out a profit.
None of this prepares us for the stellar run-up of Tesla’s stock price in the last month. The Wall Street Journal looks at this situation and compares it to oil and bitcoin bubbles. They note that it has the characteristics of a short squeeze.
The gains are proving to be a thorn in skeptics’ side. Despite some short-covering over the past few weeks, there is still some $14 billion in short interest against Tesla, making it the most shorted U.S.-traded company, according to financial analytics firm S3 Partners. Short sellers borrow stocks and sell them, profiting if they are able to repurchase the shares at lower prices.
“The situation is a textbook short squeeze, albeit on an unprecedented scale,” said Matt Weller, a market researcher at Gain Capital. Last fall, short interest in the stock was about 25%. As the price went up, those traders were forced to sell their stock, which drove the price up. That forced others to sell, which further drove the price. “And so on,” Mr. Weller said.
Short interest is still around 13%, he said, so that dynamic may not be done playing out.
Investopedia defines a short squeeze.
A short squeeze is a situation in which a heavily shorted stock or commodity moves sharply higher, forcing short sellers to close out their short positions and adding to the upward pressure on the stock. Short sellers are being squeezed out of their short positions, usually at a loss. Short squeezes are generally triggered by a positive development that suggests the stock may be embarking on a turnaround. Although the turnaround in the stock’s fortunes may only prove to be temporary, few short sellers can afford to risk runaway losses on their short positions and may prefer to close the position even if it means taking a substantial loss.
In short, if you will forgive the pun, Tesla is currently the most-shorted stock and many short sellers have been forced to get out of their positions by purchasing a higher price which in turn drives the price even higher.
These situations typically correct themselves when the stock finally heads back to its intrinsic stock value. We may have seen the start of that dynamic at the end of yesterday when Tesla fell by about $100 at the end of the session.
How Badly Will the Wuhan Coronavirus Hurt Investments in China?
More than 3,000 Chinese stocks fell by their daily limit the moment the Chinese stock market opened this morning. What is happening? A new, mutated, and lethal virus called a coronavirus has killed more than two hundred people, infected more than ten thousand and led to a virtual shutdown of large segments of the Chinese economy. This is a huge social and humanitarian disaster in the making as the virus has spread across the world to dozens of countries and air travel to and from China has been restricted. From an investor’s point of view, how badly will the Wuhan coronavirus hurt investments in China?
How Are Investors Responding to the Coronavirus Threat?
The Chinese stock markets were shut down for a week for the New Year holiday so the precipitous fall of Chinese stocks was the first response as coronavirus fears grow according to The New York Times.
The sell-off continued despite government efforts to bolster the economy. China’s central bank on Monday injected $173 billion into its financial system in an emergency move it said was “in order to maintain reasonable and abundant liquidity in the banking system and stable operation of the currency market.” It has also pledged to lower the lending rates for companies.
Other markets in the region, which have already digested much of the impact, were also trading in the red. Shares in Tokyo finished the day down nearly 1 percent, while in Australia they closed down 1.3 percent.
Although the stock markets are open again, much of the rest of the country is shut down. Travel is restricted in and out of the 11 million person city of Wuhan as well as other metropolitan areas in the East and Central regions of China. The Chinese economy was already slowing down and Chinese debt has risen greatly. Thus the world’s second largest economy already had weaknesses and needed to maintain its forward momentum in order to avoid further economic and social-political problems. Investors see this and are heading for the exits. How long the stock plunge lasts and how bad it gets will depend on a large degree on how well China is able to manage this crisis and get people back to work.
Will Investors Be Able to Sell Their Chinese Stocks?
The Chinese stock market, like many others, has limits to keep a stock rout from devastating the market in a single day. Unfortunately, this means that many investors could not get their sell orders executed in time before trading closed on their individual stocks. Thus, we can expect to see this rout go on for several days as both traders and long term investors seek to pare their losses.
A big problem is that in China it is perfectly legal and quite common to borrow money to invest in stocks. In a market that has more often gone up than down over the last few years, this could be very tempting. The problem now is that those who owe money cannot sell their stocks and may end up being “upside down” on their investment portfolios. This may be where the Wuhan coronavirus wrecks the most damage on Chinese stocks and the overall economy.
Is There Any Use for Active Investments Today
The market keeps going up and those who have simply put their money in index funds tracking the S&P 500 have done better than the vast majority of active investors. At this point you have to ask the question, is there any use for active investments today? Investing in stocks has always been a matter of picking the best stocks to invest in using an approach like intrinsic stock value. But, in the current bull market, stock picking for most folks is not doing as well as choosing and staying with an index fund. Here are some thoughts on the subject.
What Happens to Index Fund Investments in a Bear Market?
When the market goes down, any investments tied to index funds will follow. Is this a reason to get out of an index fund when you suspect that a correction is around the corner? First of all, the reason you are in an index fund is because you know that the fund will do better than managers who try to time the market. So, unless you have a crystal ball that tells you precisely where to put your money instead of the index fund you are using, stay with it. But, if you had that crystal ball, you would not need the index fund!
Market Watch had a useful piece dealing with this issue. They say there is a test of whether you will win or lose in a bear market with index fund investing.
Their advice is to use a buy and hold strategy with index funds and not to bail out when the market corrects. Rather, use a dollar cost averaging approach and continue to add to your portfolio when shares are cheaper!
Is There Any Use for Active Investments Today?
If you have invested in dividend stocks and are using a dividend reinvestment plan, this is something that you cannot do with an index fund. While the cost of investing with index funds is lower than when you routinely buy and sell stocks or when you use a mutual fund, nothing beats the free reinvestment option offered by a dividend reinvestment plan! If your money is in a stock that has been paying dividends for more than 100 years, this is a difficult approach to beat.
And, it is important when investing to understand how a particular investment is going to keep making money over the years. When you invest in a fund that tracks the S&P 500 you are putting your trust in the American economy. But, if you have unique investment skills and knowhow, you may be able to choose some investments that will replicate the Microsoft story of growing nearly 1,000-fold over the years.
Best Investment Approaches Year in and Year Out
No matter if you choose investments where you will not lose any money but also not gain a lot, or if you go with the passive index fund approach, steady investing year in and year out is more likely to be successful for the vast majority of investors than trying to time the market.
When Will the Stock Market Rally Stop?
Despite virtually unending predictions of its demise, the bull market continues. It is tempting to compare the current situation to the dot com bubble at the beginning of the century. But, Mark Cuban, the billionaire who profited from the dot com bubble and was not destroyed by the crash says that this is a different market. There were more investors twenty years ago and interest rates were higher. And, people were buying any stock with dot com in its name! So, when will the stock market rally stop? Cuban says to watch interest rates.
What Is Driving the Stock Market Rally?
Ever-higher earnings are a large part of why some of the big tech stocks keep going up. But, in an interview with CNBC, Dallas Mavericks owner and billionaire Mark Cuban says it has to do with interest rates. You’ll know when the rally is over when rates start going up.
Mark Cuban, who made billions of dollars during the dot-com boom, said Wednesday that the stock market is not reminiscent of 1999.
“Interest rates were a lot different back then,” Cuban said on CNBC’s “Fast Money Halftime Report.” “And you saw a lot more people participating in the market. … You don’t see that now. That individual day trading really led the market to be frothy.”
The levels of day trading have receded and given way to the rise of index funds, creating a fundamentally different landscape, Cuban said.
“There’s so much money chasing index funds, so as long as those funds keep on growing the market is going to go up,” said Cuban, who sold Broadcast.com to Yahoo in April 1999 for $5.7 billion.
His argument is that there is a lot of money looking for investments and, so long as rates are low, the stock market and its derivatives art still where the best return lies.
How Abruptly Will the Market Change Direction if Rates Go Up?
Investopedia discusses the effect of interest rates on investments in an article about what can cause a significant move in the stock market.
Rising interest rates can place downward pressure on real estate investment trusts (REITs) and slow the housing market. Higher interest rates mean higher borrowing costs slowing down purchasing activity and causing stock prices to dive.
These factors will come into play a bit at a time as rates go up and earnings drop off. However, the stock market anticipates events as wells as reacting to them. Many investors, like Cuban, will make adjustments as soon as rates start to rise in anticipation of the bull market ending. We have often noted that Warren Buffet’s silent warning to investors is that (like before the dot com crash) is stockpiling cash!
What Else Could Stop the Rally?
The threats of war, societal chaos, and economic collapse can all drive the market down temporarily. For example, the Chinese coronavirus may be an opportunity for some pharmaceutical stocks, but a global pandemic like the Spanish Flu epidemic a hundred years ago that killed 500 million worldwide would have widespread effects on the economy, investments, and governments!