Where Do We Go From Here?

March 18th, 2020 by Tanner Wrisley

COVID-19 has decimated the stock market causing temporary forced closure of businesses and individuals practicing “social distancing”. Most companies are going to see a huge loss in revenue and will not be able to mitigate costs enough to stay profitable for the coming quarter(s). Travel stocks, retail stocks, hospitality stocks, and countless others will be extremely affected by the virus slowdown, and it’s reflecting in their stock price. Some of the hardest hit stocks are trading down 80% from where they were in mid-February. So, what should an investor do now that we are in the thick of it?

In times of volatility, many look to the bond market for safety. However, with the Fed lowering interest rates to zero, bond yields are very low and offering very minimal returns. Many investors feel trapped with nowhere to hide. And the unfortunate truth is, in the short-term, there may not be a good place to hide. Record breaking volatility has become the norm over the past few weeks. But there are certainly stocks out there that may see a faster turnaround than others.

Many investors are rushing into stocks that will have a short-term boom in revenue, like Clorox for example. Be wary of jumping in due to a short-term event. Clorox may very well see a better-than-expect quarter, maybe even two quarters, depending on how long the virus keeps growing. However, after everyone has stock piled their cleaning supplies, and the worldwide virus’ affect starts to diminish, there may be a serious decline in demand for those products. And a company like Clorox may see muted revenue in 2-4 quarters from now. Although, the ups and downs from a cleaning supply stock may be less than that of any retail stock right now, this is not the type of investment we are looking for.

We are taking a look at consumer shifts occurring from the virus that will have a lasting effect. Take Docusign as an example. In the recent weeks, many businesses have had to adapt to their employees working from home. This requires companies to have more online technology that provides electronic paperwork and signatures. Docusign may take advantage of this short-term increase in demand, just as Clorox would. However, where Docusign differs is in the longer-term outcome. We expect many businesses to see success with the work-from-home model. If companies realize they can get the same level of work efficiency from their employees without having to pay for office space and overhead, they may switch permanently to this model. That will cause a continued use and expansion on services like Docusign, long past the effect of the virus. This is different than Clorox where the increase in revenue is temporary.

Another type of stock that we find of particularly good value right now are non-cyclical stocks, specifically the utilities sector. While people are sheltered inside for extended periods of time, we expect demand for electricity, gas, and other utilities to stay somewhat constant or even slightly increase. And yet, the utilities sector has seen a 15% decline in stock prices as of this writing. This decline can be attributed to wholesale selling and index selling. Many investors in these down markets, choose to sell out of all of their equities or sell out of a S&P 500 fund as a whole. Sectors like utilities get swept up in this hurried selling even though their earnings prospects have not changed. Additionally, utilities have typically performed well in low interest rate environments for two reasons: 1. As part of their normal business operations, utilities have always been large borrowers and will benefit from the lower cost of borrowing; 2. Investors looking for yield will not be able to find it in the bond market and many turn to sectors like utilities that have decent dividends and are typically less affect by cyclical markets.

At Anchor Bay, we are implementing these ideas into our clients’ portfolios. We are taking small positions in select companies that we believe have the best prospects to come back strong from affects of the Coronavirus pandemic. We are not trying to time the market or predict the bottom, but invest small portions throughout the downturn to take advantage of the good valuations. Although things in the market seem bleak right now, we do believe a turnaround is coming in the future.