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Even With This Crisis It’s a Market of Stocks

2020-03-19

Introduction

It’s stating the obvious to say that the stock markets have been in a freefall as a result of the coronavirus.  However, I think it’s also important to point out that what we have recently experienced in the stock markets more resembles a flash crash than it does a correction.  Furthermore, I think it’s also important to point out that what has been happening was and is not financially driven.  Instead, what we are experiencing is the result of an unprecedented health crisis that was unpredictable, and the full extent of the potential damage is yet to be fully understood or known.

With that said, a lot of what we are seeing is the result of raw emotion and fear.  During times like these, fundamentals don’t matter very much because panic rules the day.  On the other hand, in the longer run fundamentals do matter, always have and always will.  Therefore, the threat of the virus will eventually wane, and people will inevitably come to their senses.  As a result, logic would also dictate that once the fear abates, then reason and logic will once again rule the day.

Moreover, even though this was not a financially instigated market collapse, the virus will surely leave its mark by creating economic damage.  Unfortunately, the full extent is not yet known, and therefore, since markets abhor uncertainty, it is difficult to precisely assess when things might turn around.  However, I am confident that they inevitably will.

The following earnings and price correlated FAST Graph for the S&P 500 clearly illustrates not only the magnitude of this recent market malaise, but also the velocity with which it occurred.  As you can see in the pop up, the approximate damage to the overall market has been in excess of 25% since the end of February:

Based on what I showed above, the overall market has generally experienced significant damage over a very short period.  However, as I indicated with the title of this article, it is a market of stocks and not a stock market.  Perhaps you could never find better evidence than by examining some of the individual constituents of the S&P 500 itself.  In the aggregate, the market has fallen precipitously.  On the other hand, there are specific pockets of the market that have performed extremely well.

Consumer nondurables that provides foods and cleaning supplies have been especially resilient.  Clorox with its bleach products is one classic example:

Clorox Co (CLX)

Food retailers such as Kroger and even retail giant Walmart are doing exceptionally well, although Walmart remains significantly overvalued while Kroger is currently available at or near fair value.

Wal-Mart Inc. (WMT)

Kroger Co (KR)

Some Stocks Have Fared Well and Remain Fairly Valued Opportunities

J.M. Smucker was undervalued at the start of this extreme volatility.  However, even though it has performed extremely well, it remains slightly undervalued or perhaps fairly valued.

J.M. Smucker (SJM)

REITs Have Been Especially Hard-Hit, But Not All REITs

Digital Realty Trust is a datacenter REIT that has remained popular and significantly overvalued.  Not all stocks even in the same asset class are performing the same.

Digital Realty Trust (DLR)

In contrast, Simon Property Group, the leading mall REIT is being priced as if it is going bankrupt.  However, as of the time of this writing, the stock is up 24% over yesterday’s close.  Extreme volatility is a hallmark of irrational markets.  Even after today’s rise, this A rated REIT offers new investors a current yield of 14.85%.  The question is, an opportunity of a lifetime or imminent disaster?

Simon Property Group (SPG)

There are Growth Stocks That Appear Very Attractive Based On Hyper Growth

Netflix and Amazon are classic examples.  Although Netflix trades at an extremely high P/E ratio, the company’s earnings growth is expected to continue growing at rates exceeding 35% per annum.

Netflix (NFLX)

Amazon is a cash flow demon and is available at a discount to how the market has historically valued it based on operating cash flows.  The company seems to be immune to the virus.

Amazon (AMZN)

Certain Healthcare Companies and Biotech Stocks Might Be Part Of The Solution

Gilead has developed an antiviral therapy called Remdesivir, is thought to work by blocking the virus from reproducing itself in the body.  Current studies indicate that Remdesivir basically stops the production of the virus. Remdesivir was one of the potential treatments mentioned by President Donald Trump during a press briefing on Thursday. He announced that federal health officials are removing barriers in attempts to roll out treatments as fast as possible.  As a result, Gilead has been a strong performer and yet remains attractively valued relative to its fundamentals.

Gilead Sciences Inc (GILD)

Summary and Conclusions

The singular purpose of this article was to illustrate to the reader that it truly is a market of stocks.  Therefore, even during this extreme crisis which has caused a literal flash crash in the overall markets, there are still pockets of strength.  Additionally, there remain many companies that are significantly overvalued even in the context of what has occurred recently.  Therefore, I asked the readers to apply our common sense and recognize that not all stock investments are the same.  Even in the crazy market we’ve been in, there are still pockets of value to be found and there are still dangerously overvalued stocks to be avoided.  Additionally, if you look closely enough you might even find opportunities of a lifetime amongst the rubble.

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Disclosure:  Long SPG,SJM

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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