Cash + Quality + Cap = Comebackability
A great many stocks are excellent investments right now. With the Coronavirus, I keep finding myself saying that “this too shall pass.” It will. Sooner or later. And when it does – you need to be ready.
As there have been many explosive moves to the downside, there will also be explosive moves to the upside. So far, it has been down 2, up 1, and soon it will switch to up 2 down 1.
Here’s the trick: The stocks that you want to own coming out of this are not the stocks that you owned going into this. This means you have to raise cash and this means you have to sell stocks at bad prices. This is the cost of admission. If you are willing to do this then there is a decent chance you may experience a double bounce back. First the bounceback of the fast-moving stocks that everyone wants to own, then, take your gains and reallocate to stocks trading at great prices that are sure to survive. This second bounceback may include stocks like casinos, restaurants, and the travel sector. It will also include small-cap companies and other less obvious winners. These stocks will likely take longer to bottom, as the full impact of the coronavirus must be understood before prudent investments can be made. These may also be slower to rebound due to reputational tarnish and information diffusion.
Raising this cash will also give you the mental freedom you need to make objective investments. All investors need objectivity to operate at peak performance. It’s not easy, but it is required.
Here are a few investment themes you might want to consider right away.
- Large Cap tech , specifically, AMZN, GOOGL and FB. I believe these represent a higher tier than MSFT (MSFT has shot its wad transitioning from software to services and is now just a monopolistic legacy with a fully divested founder. NFLX’s lower barriers to entry will bring more intense competition + enduring valuation risk AAPL – Apple is likely to have material supply chain damage and will be a good investment soon enough, but not yet. You can buy AAPL, with your profits in the tier 1 ideas. Large Cap Indices are a close runner up here too.
- Berkshire Hathaway BRK-B. Warren Buffet seems to be at his best at times like this. He can also get deals that you and I cannot get because his investments are so big, the companies issue him shares directly on special terms because they need the cash. His cash is going to the companies directly, not to existing shareholders. When the news gets out Buffet is in, the company will probably pop, because it is now ordained and thought to be safe. Additionally, these companies, armed with a war chest of Berkshire Hathaway cash can now buy firesales assets, better establish a dominant position among their competitors, and create a truly virtuous cycle. By the way, Warren Buffett had stockpiled 125 billion dollars in cash to put to work in just a situation like this. He just put 10 billion into OXY getting a preferred 8 per cent dividend to wait while the company retrenches. Many more of these to come.
- It is finally time to take a more international perspective. Since the end of the last housing credit induced crisis, International investing hasn’t worked out well when compared to the United States. One of the reasons for this is that the dollar has been relatively strong. A strong dollar attracts capital from around the world. This benefits stocks, but it is caused by interest rates. The US had better interest rates, so the dollar was a better place to park your money. Higher relative interest rates are now a thing of the past. The lack of an interest rate advantage has normalized the field for stock market investing around the world. Now, better values and growth rates around the world no longer face the strong dollar headwind.
- When you think about making an investment now, think about investing in companies so widely regarded as being good companies, that any investor demand will be sky high since they are finally offering a “good entry price.” This is not the time for small caps. This is not the time to get too cute. Blue Chips. The less obvious opportunities will still be there. find great investments in the smallcap world after you’ve banked 30% profits in the widely-held most recognizable Blue Chip names. I’d caution about making any Investments right now that aren’t among the Top two hundred largest companies in the world.
Stocks are fundamentally priced at the discounted value of their future earnings or cash flows. The formula is this:
When interest rates are low, discount rates will be low, shifting more of the company’s valuation into its future earnings production. For example, Let’s say a company didn’t sell anything for 1 full year due to the Coronavirus. if the company has zero fixed costs, the value of the company should decrease 5% and should decrease by 10% if the company is incapable of reigning in any expenditures. This is based on a reasonable market P/E of 20 and a 4% discount rate. In other words, the earnings power of any company for the year 2020 is worth a maximum of 10% of the company’s stock price.
Provided of course, that the company survives. You can look for cash on hand, quick ratios and other debt ratios to test for solvency risk. This is not a big risk.
As of this writing, March 16th 2020, the S&P 500 stock index is down 29% from its high less than 1 month ago. This should smell like the opportunity.
“Be greedy when others are fearful and be fearful when others are greedy.” – Warren Buffet
I believe that aggressive Global actions to prevent the spread of the pandemic will be mostly successful. I think the Coronavirus issue will be gone before summer. The first-quarter GDP might take a hit. So what? If the math says that companies should be down five 10% tops, and the market is already down 29%. That’s your opportunity.
I’m not trying to call a bottom, I’m just calling out the overreaction. The overreaction is your opportunity. This too shall pass.
James’ professional orientation points at the zenith (and sometimes nadir) where technology and investments intersect. He is a Fintech entrepreneur and has served twenty years of a lifetime sentence.
James is a patented inventor, quant pioneer and investment manager. He is the founder of Gravity Investments, a unique investment and technology services firm centered on James’ inventions for diversification measurement, optimization, visualization, and analysis. In the development of the platform, James has pioneered A.I applications, diversification attribution, down-side diversification, portfolio re-optimization, full-lifecycle strategy optimization, programmable investment policy statements and core-satellite optimization techniques.
In working with advisors, funds and money managers as both a strategic sub-advisor and software consultant, James has consulted and trained hundreds of professional investors on portfolio design and optimization. James has a unique ability to look at any investment process and find practical, intelligent and often quantifiable opportunities to improve the investment product.
Inspired by the work of Nobel Laureate Harry Markowitz and the efficient frontier, James has championed and pioneered the science of diversification. James’ technology has advised
or assisted in over 30 Billion dollars of investor capital. His vision of a more perfect investment management system is at the heart of Gsphere ( www.gsphere.net )
His passion for performance, curiosity for the unknown, and drive to excel empower his service to investors.
James is Founder and CEO of Portfolio ThinkTank (the B2C company) www.portfoliothinktank.com, Founder & Chief of Financial Engineering at Gravity Investments www.gravityinvestments.com (the B2B company) and Chief Investment Officer at Gravity Capital Partners, a wholly owned SEC Registered Investment Advisor.