The coronavirus pandemic has battered share prices and raised fears of a sustained global economic downturn. How can investors identify stocks like Amazon, best placed to weather the storm?
Recent reports from investment bank Goldman Sachs [GS] have attempted to give investors guidance on how to best navigate the choppy stock market waters during the coronavirus pandemic. In one report the bank divided company share prices - including Amazon’s -, into four clear categories.
The first involves firms such as Amazon [AMZN] — the share price of which is up 27% YTD through 16 April — and Procter & Gamble [PG]. These stocks are seeing ongoing demand during the crisis, as people order online and still require household commodities.
Finally, there are those share prices that will recover over the long-term as the pandemic controls begin easing and the economy returns to some semblance of normality. Disney [DIS] was one such example, as its theme parks will once again be able to operate. So, is it possible to consistently identify stocks like Amazon, whose share price has remained resilient to COVID-19-induced volatility (thus far)?
Keeping on track
In a separate report, Goldman Sachs looked for stocks with a track record of 90-consecutive quarters of dividend payouts without a cut, as well as strong cash reserves and healthy balance sheets. Names on this list include Home Depot [HD], IBM [IBM], 3M [MMM] and Cisco Systems [CSCO].
“These Russell 1000 companies have continuously demonstrated their commitment to their dividend and have not significantly underperformed the index since the market peak,” Cole Hunter, Goldman Sachs’ US portfolio strategist, said in a note.
“These Russell 1000 companies have continuously demonstrated their commitment to their dividend and have not significantly underperformed the index since the market peak” - Cole Hunter, Goldman Sachs’ US portfolio strategist
“Just as human bones get stronger when subjected to stress and tension, and rumours or riots intensify when someone tries to repress them, many things in life benefit from stress, disorder, volatility, and turmoil,” the publication noted, quoting an Amazon write-up of Antifragile by Nassim Nicholas Taleb. “The antifragile, and only the antifragile, will make it.”
Here, antifragile means buying companies that were growing strongly before the crisis, are strengthening during it and have very good long-term growth prospects.
Amazon fits all three categories. Its share price has soared from $1,844 in on 15 April 2018 to $2,283 as of 14 April this year. Demand, it appears, has been further boosted by lockdown customers using the online retailer for essentials and other items to keep entertained. Over the long term, the group is set to benefit not just online but through its cashier-less store technology.
Microsoft is also getting a coronavirus boost. As more employees set up remote meetings, and it will benefit over the long term from its cloud services such as Azure. Zoom also ticks the boxes with revenues soaring, gross margins of around 81% and “lots of low-cost R&D coming out of China,” according to the Seeking Alpha article.
Zoom is not just benefiting from more business use during the pandemic, but yoga and other fitness classes are also going online to benefit from remote customers.
“There are an almost infinite number of situations where remote connectivity will meet the needs and preferences of a growing number of people across the US and world,” the article noted.
Bank of America [BAC] has created its own list, picking out Apple [AAPL] which it likes as it has “most of the negative news related to the coronavirus already priced in” with its current level of $273.25 an “attractive entry point”.
It also likes Honeywell [HON] for its strong balance sheet, lower operational risk and cash-flow generation. “We see Honeywell’s diversification, backlog, and mix of long-cycle revenue as offering above-average revenue visibility,” the corporation said.
“We see Honeywell’s diversification, backlog, and mix of long-cycle revenue as offering above-average revenue visibility” - Bank of America
In the consumer space, it also likes Procter & Gamble as it is “one of the first stocks many top banks recommend when volatility drives markets, and investors, to seek slow but steady capital growth with reliable dividend payments.”
Five key areas to focus on
All of these lists of the positive stocks in reaction to the coronavirus — including those from Goldman Sachs — have largely been created by assessing their technical and fundamental attributes. These include performance, consumer exposure, dividend payments and health balance sheets and cashflow.
Goldman Sachs has also identified five key areas which investors and traders should consider when looking for equities in uncertain times.
The first is to look at stocks with durable secular growth stories and strong balance sheets. “The coronavirus has dealt a tremendous blow to overall demand. That’s why every decision we make about which companies to invest in from a fundamental perspective begins with the balance sheet,” the investment bank states.
“The coronavirus has dealt a tremendous blow to overall demand. That’s why every decision we make about which companies to invest in from a fundamental perspective begins with the balance sheet” - Goldman Sachs
“Strong balance sheets buy companies time. We look for companies on the right side of technological disruption that also have enough liquidity to get them through an extended shutdown,” it adds.
By looking at China’s experience of the coronavirus, Goldman Sachs has also determined that consumers will be the last to recover when the outbreak ends. “Value retail stocks and restaurants that typically do well in recessions will likely struggle this time, as most businesses are closed or seeing reduced foot traffic,” it notes.
Investors need to “think like a millennial.” As such, business “with strong digital strategies should be able to strengthen their brand and increase market share,” Goldman Sachs says. It adds that it thinks the “lasting impact of this pandemic will be historical levels of government and capital market support for healthcare innovation.”
Goldman Sachs stresses that growth will continue to outperform value where stocks with high-interest coverage ratios are most likely to weather the storm. “Firms with even marginally higher leverage are likely to be punished by investors,” it states.
“Firms with even marginally higher leverage are likely to be punished by investors” - Goldman Sachs
“Others include those exposed to travel, have cyclical and global exposure, and are dependent on physical presence such as restaurants and gyms.”
In a period of vast uncertainty, it is reassuring that there are always certain truths traders can rely on.