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These 8 Sectors Could Defy The Coronavirus Sell-Off


Place one in the win column. Even though the rally could never attract enough fence-sitters to match other rebounds during this meltdown period, it was something of a moral victory to see all the major indices close higher.

Moreover, I like the fact it wasn’t another four-digit session for the Dow Jones Industrial Average (DJIA) on Thursday. I’m not being facetious. This market needs to stabilize, and the pendulum must stop swinging back and forth so violently even on the upside.

Without sounding too corny, I’m also thrilled it’s the first day of spring. My favorite season is filled with hope and renewal. The timing is perfect for a world struggling to regain its sanity. You know what they say: sunlight is the best disinfectant. 

Meanwhile, while the stock market has plunged at the fastest pace in history, there are moments when all stocks look oversold, including industries that were fading long before the coronavirus showed up. 

Revived by crisis

  • Delivery services
  • Video games
  • Streaming companies
  • Telecommuting
  • Industrial chemicals
  • Plastic
  • Marijuana
  • Dine at home kits

All the above have translated into stock market winners, rising above the smoldering embers of the broad market. However, beware of which will fade, and which will continue to work when the world returns to normality. The nuclear family is also a winner in this crisis. It was coming under assault as an American phenomenon that led to broken dreams and a broken nation. 

There is something wonderful about being close to family and being able to hop in the car to see the grandparents (nothing makes me happier than mine coming to visit us).

Record-Breaking Yawners

For some big movers, it was just an oversold bounce, but investors embraced shares of companies that definitively said they’ll get through and even prosper along the way.

Yesterday, crude oil enjoyed its best single-day pop ever, rallying 20% after a devastating move that threatens to destroy the American fracking miracle.  I’m getting more questions about buying oil names than any other industry. While I believe A) there will be a bailout, B) Russia and Saudi Arabia will wake up, and C) the better operators will come out of this with greater market shares, I think you should proceed with caution.

Shares of Darden (DRI) rallied 24% on good earnings, which is remarkable since restaurants are bearing a significant brunt of a shut-in world. Management couldn’t offer guidance, but the stock zoomed after the initial indecision. Chipotle (CMG) took off as well. We are keeping notes on all these moves, which will inform investment decisions down the road.

It’s not a guess or even a hunch that shares of Guess (GES) were the big winner of the session after posting earnings that beat the Street on revenue that was shy of expectations.

What sent the stock up 124%?

“We closed the year with strong liquidity and a solid balance sheet, which positions us well to navigate through the current coronavirus crisis” Guess CEO

I think you must be overweight in Technology, especially software and cloud service names. After the bell, CrowdStrike (CRWD) posted financial results that beat the Street on revenue and earnings.

  • Subscription revenue: +90%
  • New subscribers: 870
  • Gross margin: 75% from 70%

More importantly, the company raised its guidance.  Guidance? Yes, guidance.

Management sees revenue at the high-end of the range of $167.6 million against the consensus of $149.1 million.

Moral of the Story

So, there will be names that pop from being so oversold and names that pop because the business continues outsized growth and market share gains.

Are We There Yet?

There are a lot of signs that professional investors look for to determine bottoms or a big enough shift in risk-reward ratio, including price-to-earnings (P/E) valuations. Stocks are of course cheaper, but are they cheap enough?

I know folks that would argue the S&P 500 could move lower, but when considering the yield of the ten year, the index looks inexpensive. On that note, Transportation looks cheap, but it comes with an outsized risk, even at these levels.

I find Utilities more compelling than usual, in part to the fact valuation has come down a lot and the yield looks fantastic. I must move my mindset away from the notion this is a defensive sector because in a world of negative interest rates, these are more than safe havens.

Key Indices

PE

Year earlier

Forward PE

Yield

S&P 500

18.10

20.98

15.12

2.30%

NASDAQ 100

22.75

22.56

18.63

1.15%

Dow Industrials

15.61

18.07

14.08

3.23%

Dow Transports

12.51

16.61

10.94

2.62%

Dow Utilities

18.93

25.60

17.21

3.72%

Russell 2000

38.61

45.12

18.79

2.09%

 

A Peek into Big Box Retailers, Peer Review (Andre Messiah and Charles Payne)

Target (TGT)

Quarterly Periods

U.S. Comp

E-comm

Revenue

Op margin

Cash

Jan 2018

+5.3%

+31.0%

+0.0%

4.9

$1.55 billion

Apr 2019

+4.8%

+42.0%

+5.0%

6.4

$1.17 billion

July 2019

+3.4%

+34.0%

+3.6%

7.2

$1.66 billion

Oct 2019

+4.5%

+31.0%

+4.7%

5.4

$.969 billion

Jan 2020

1.5%

+20.0%

+1.8%

5.1

$2.57 billion

 

Notes: Jan 2019 cash from operations $7.1 billion from $6.0 billion

Comp-store sales:

  • Traffic: 1.3
  • Ticket: 0.2
  • Total: 1.5

Walmart (WMT)

Quarterly Periods

U.S. Comp

E-comm

Revenue

Op margin

Cash

Feb-19

4.2%

43.0%

1.9%

4.4

$7.72 billion

May-19

3.4%

43.0%

0.98%

3.9

$9.25 billion

Aug-19

2.8%

43.0%

1.9%

4.3

$9.28 billion

Nov-19

3.2%

41.0%

2.5%

3.7

$8.6 billion

Feb-20

1.9%

41.0%

2.1%

3.7

$9.4 billion

Additional Notes:

February 2020 comp-store sales:

  • Transactions: 1.0
  • Ticket: 0.9

Total 1.9

Costco (COST)

Quarterly periods

US Comp

E-Comm

Revenue

OP Margin

Cash

Feb-19

+7.4%

10.2%

+7.3%

3.4%

$6.1 Billion

May-19

+7.0%

22.0%

+7.4%

3.2%

$7.01 Billion

Sep-19

+6.2%

19.8%

+7.0%

3.1%

$8.4 Billion

Nov-19

+6.7%

5.5%

+5.6%

2.9%

$9.02 Billion

Feb-20

+9.1%

28.4%

+10.4%

3.2%

$7.8 Billion

Management noted late-quarter coronavirus-drive momentum, which powered comp-store sales above 12%.    

February sales benefited from an uptick in consumer demand in the fourth week of the reporting period. We attribute this to concerns over the Coronavirus and estimate the positive impact on total and comparable sales to be approximately 3%.

  • February comp-store sales: +12.4%
  • February e-commerce: +22.6%

Valuation Comparisons

Big Box

Peer Valuations

Forward

Price to Earnings

PEG Ratio

Price to Sales

Price to Book

TGT

16.7

1.4

0.70

4.52

WMT

22.4

3.8

0.63

4.40

COST

36.6

4.6

0.90

8.79

Big Box Investment Conclusion

These three big-box retailers are all well-positioned to benefit from addressing the needs of the public during the coronavirus panic, and the potential longer-term changes in purchasing patterns. It’s clear Target (TGT) has struggled after three blockbuster financial releases, each sparking a higher leg up in the shares (April, July, and October release dates). 

Meanwhile, Walmart (WMT) has been the most consistent with strong e-commerce sales growth. While the stock is near all-time highs and has an elevated (forward) price-to-earnings (F P/E) ratio, the shares are in-line with rivals, using price-to-sales (P/S) ratio and price-to-book (P/B) ratio. 

Costco (COST) had the best business trends before the virus took control of our daily lives, but the stock is pricing in great things.

We would continue to hold onto Cost and Walmart (if owned), and we are spying a point to reenter Target.  There are additional factors, including technical points.  

Portfolio Approach

Today’s Session

There has been less volatility overnight, and equity futures have been higher for most of the morning, but there’s still a sense anything can happen at any time during the session.

Technical View

The S&P 500 is locked into the perfect downward spiral, with a very rigid trading channel that continues to resistance points hold while new lows are created.  This pattern must be reversed to gain any traction to an upside move.

Right now key support is 2,367, which must hold, or we tumble to the bottom of the channel. The first big upside test is 2,562.

S&P 500, Index, 30, SPCFD



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