How to Pick the Best Stocks to Buy During The Coronavirus?
When the going gets tough, it's time to go shopping. Easier said than done, though. For many investors, the question that's been grappled with is whether or not to sell stocks. At this point after the market's awful run in March 2020, selling out and calling it quits would -- in most circumstances -- be a mistake.
But for those investors with at least a few years to wait things out and the resolve to pull the trigger, the market is awash in bargains. A lot of attention gets paid to a company's sales momentum. While growth is most certainly an essential factor, it's only one way to whittle down the field of best stocks to buy during the COVID-19 crisis.
Well, 2020 is sure off to an exciting start. Life as we all know it is on hold thanks to the spread of COVID-19 around the world. Stock market values around the globe have been decimated on fears of what the Coronavirus will mean for the global economy. We have seen Volatility well beyond normal levels. Franklin Templeton shared "Things You Need to Know to Ride Out A Volatile Stock Market." Keep reading as we share these tips and add some insights on what else you need to be doing now.
"To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward."-Sir John Templeton outbreak of COVID-19, a novel coronavirus strain which originated in China but has since gone global, is a big deal. To date, it has infected over 1 million people across the globe, killed at least 50,000, kept billions of people in their homes, brought the global economy to a screeching halt, and caused U.S. stocks to fall off a cliff.
But, not all is hope lost, and now may be the time to look for U.S. stocks to buy on the dip. For a few reasons.
First, according to my modelling, the coronavirus pandemic has peaked in certain Asian countries, is rising in certain European countries, and will peak within the next two weeks in the U.S. after that, the spread of the virus globally should slow, before being wholly stomped out in May or June.
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Second, the U.S. economy has ample firepower from tons of fiscal and monetary stimulus to rebound, albeit gradually, in the summer once the virus is under control.
Third, U.S. stocks are pretty cheap right now, with many top-quality shares trading at their lowest valuations in years, if not decades.
So, as opposed to running away from stocks during this scary time, I'm running towards them, building a portfolio of long-term winning assets at heavily discounted prices.
Bottom-feeding in bear markets is a favourite pastime of some of history's greatest investors. Peter Lynch, the legendary growth-oriented portfolio manager of Fidelity's Magellan Fund, was at the helm during Black Monday in 1987, when the Dow shed 23% in a single day. One of Lynch's most firm beliefs is that selling in desperation always means you're selling on the cheap. The coronavirus-inspired stock market sell-off has made several high-quality long-term businesses available for steep discounts. Keep in mind that "catching a falling knife," so to speak, is very often risky business – but if you've got the willpower to weather some short-term losses for potentially outsized long-term gains, here are seven of the best bargain buys in the stock market following the steep early 2020 market sell-off.
Not to mention the health effects of the coronavirus pandemic, the financial impact of the COVID-19 virus has infected all leading stocks, including Apple (AAPL), Microsoft (MSFT), Mastercard (M.A.), Tesla (TSLA), Nvidia (NVDA), and Paycom Software (PAYC) virtually.
Even higher demand as a result of the coronavirus crisis for FANG stocks like Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL) doesn't leave them unscathed.
As a result of the Wall Street carnage, Tesla stock and Nvidia stock were recently removed from IBD Leaderboard.
After such a sharp stock market decline, investors are right to be wary of any rebounds and rallies. It will take time to establish a bottom and launch a new stock market uptrend. In the meantime, avoid the temptation to jump back in too early. At times like these, you want to protect your portfolio and wait for a follow-through day to start getting back into the stock market — gradually.
It seems the U.S. stock market's bull run is coming to an end. The Dow has already plunged into the bear-market territory for the first time in a decade. And the blue-chip index's descend from a recent peak has been the fastest since the Great Depression. This time, it just took 19 trading days for the 30-stock average to enter a bear market, while in November 1931, when the Great Depression was evolving, the index took a brisk 15 days to pullback at least 20%.
Other major benchmarks, including the broader S&P 500, are also headed for a bear market. What's more, the period of a typical bear market has a propensity to be pretty lengthy. On average, a bear market for the Dow and the S&P 500 lasts for 206 and 146 trading days, respectively, per data compiled by Dow Jones Market Data. U.S. stocks, by the way, had already slipped into correction mode in February.
But what's dragging stocks into a bear market? Investors are mainly tensed about the economic impact of the fast spread of Coronavirus across the globe. Several companies have already raised alarm bells about the outbreak weighing on their earnings, and supply chains get disrupted. And it will undoubtedly lead to both a demand and a supply shock for the global economy, as it mostly erupted in China. After all, China is one of the world's largest exporters and importers of goods.
Top equity strategist at Goldman Sachs, David Kostin, thus expects S&P 500 companies to see a collective drop of almost 15% in their earnings for the second quarter, and a decline of around 12% in the third.
Meanwhile, President Trump failed to quell worries about the possible economic slowdown from the Coronavirus. In an attempt the curb the negative impact of the virus on the economy, he announced travel restrictions with Europe. He promised to offer "a payroll tax cut or relief" to both business houses and hourly wage earners.
But his proposals were received with scepticism from both Democrats and Republicans, as they were mostly looking for a more robust fiscal policy to counter slowing economic growth. At the same time, it's quite evident, not all his proposed plans are likely to get passed in the Democratic-controlled House of Representatives. U.S. Treasury Secretary Steven Mnuchin did mention that it will take some time for the economic stimulus measures to get through Congress.
Recently, the World Health Organization declared the Coronavirus outbreak a global pandemic. After all, governments from Italy to California have imposed bans on public gatherings in a move to restrict the spread of the illness. And this restriction in consumer movement will ultimately impact economic growth worldwide.
Items such as hand sanitizer, toilet paper, and bottled water have flown off shelves over the past week as consumers prepare for an outbreak of the deadly Coronavirus in the United States. Furthermore, limited delivery availability warnings from e-tailing giants Amazon.com, Inc. (AMZN) and Walmart Inc. (WMT) have added to the frenzied buying at brick-and-mortar stores in scenes that give reality T.V. show "Doomsday Preppers" a fleeting moment of relevance.
"Panic buying is a self-fulfilling prophecy. If everyone thinks things are going to run out, they go and buy out things, and they do run out," Karen Girotra, professor of operations at Cornell University, told USA Today.
As retailers scramble to restock their supplies, traders may find buying opportunities in companies that manufacture and sell these in-demand staple products. Let's take a further look at three such stocks and use technical analysis to identify possible entry points.
Kimberly-Clark Corporation (KMB) manufactures and markets personal care and tissue products under the Kleenex, Scott, WypAll, Kimtech, and KleenGuard brands. As well as getting a boost from increased toilet paper sales, the 148-year-old consumer defensive stock should benefit from its K-C Professional segment that sells workplace safety and sanitary products such as wipers, soaps, and sanitizers. Kimberly-Clark shares have a $50.06 billion market cap, offer a 2.99% dividend yield, and are trading almost 8% higher on the year as of March 9, 2020.
Kimberly-Clark stock has traded in a 20-point range since June, threatening in recent sessions to break out above crucial overhead resistance at $147.50. Traders should look for entry points near $141, where price finds vital support from second quarter swing highs and the 50-day simple moving average (SMA). If the stock falls below this level, the trading range's lower trendline provides significant support at $127.50.
Boeing's had a rough go for the last year. The mega-cap aerospace and defence company first had the 737-Max debacle, and now the coronavirus bear market is forcing Boeing to draw down on its lines of credit, possibly to the tune of more than $10 billion. The dramatic hit to the airline industry that came as a natural result of sharply reduced travel demand isn't helping Boeing either, as demand for future planes is pushed indefinitely into the future. All that being said, Boeing shares are down nearly 70% from their 52-week highs. Even though JPMorgan (JPM) slashed its price target from $370 to $210, that implies an enormous upside from current levels.
Discover Financial Services
The forgotten redheaded stepchild of the credit card companies, Discover Financial, looks like an absolute steal in today's market. Trading at an incredibly low price-to-earnings ratio of 3.86, analysts expect five-year earnings growth of 10% annually, giving DFS a rock-bottom price-earnings growth ratio under 0.6. It pays a 4.6% dividend to boot, and with shares down more than 50% from 52-week highs, unless it takes seven or eight years to get back to those levels, DFS stock should generate impressive returns as soon as the fears and economic impact of the Coronavirus fade away. Commerce is sure to be affected, no doubt, but will Discover go bankrupt due to a short-term blip in consumption? That seems highly unlikely.
Global technology giant Apple has been struck from multiple angles thanks to the coronavirus outbreak. At first, when it was isolated to China, Apple had to close all of its corporate offices, stores, and contact centres in China. Many of the factories from which Apple sources its hardware products were shut down, too. That created huge demand and supply chain disruptions for Apple.
Now, though, the virus has gone global — and the shutdowns that were isolated to China, are happening everywhere. Across the globe, Apple has closed its stores, and its supply chain is being disrupted.
These are significant issues for Apple. But they are also temporary issues.
Just look at China. The spread of the virus has died down over there. Apple has reopened all of its stores. Most of its supply chain has come back online, too.
The rest of the world will follow suit within the next few months. By summer, most countries across the globe will have fully contained Coronavirus. Apple will reopen stores. Factories will ramp up production. And the Apple growth narrative will start to fire on all cylinders again, just in time for its big 5G iPhone launch in the back-half of the year.
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Tips To Ride Out
Watching from The Sidelines May Cost You
You may think selling all of your stock and bonds (or mutual funds and ETFs ETSY) is the safe thing to do. Perhaps you have even convinced yourself that this is the smart thing to do. Consider this, according to Franklin Templeton, "On average, for the 12 months following the end of a bear market, and a fully invested stock portfolio had an average total return of 37.1%. However, if an investor missed the first six months of the recovery by holding cash, there would have been only 7.6%."
"Going back to 1930, if an investor missed the S&P 500's ten best days in each decade, total returns would be just 91%, significantly below the 14,962% returns for investors who held steady through the downturns." -CNBC, March 7, 2020
Dollar-Cost Averaging Makes it easier to cope with Volatility
If you are sitting on a massive pile of cash, you may be asking yourself, "Is Now A Good Time to Be Investing in Stocks?" For the rest of us, dollar-cost averaging (DCA) makes it easier to answer the question of should you be investing now? The answer will almost always be YES. Ok, I can hear a few of you asking through your computer screens, "What is dollar-cost averaging?" DCA is when you put a set amount of money away regularly into an investment or investments. If you have a 401(k) plan at work, you put money in every paycheck; you are dollar-cost averaging into that retirement account.
With DCA, you will buy more shares when prices are low and fewer shares when prices are high. Over time, that should result in a lower cost per share, which is less than the average price per share. Franklin Templeton pointed out that DCA does not guarantee a profit or eliminate risk. That being said, it does help reduce the likelihood that you will make a considerable investment into stocks right before a significant drop in the current value of your holdings.
Now May Be A Great Time For a Portfolio Checkup
Now is a great time to review your investments and your various financial goals. I have fielded a slew of calls from people who were panicked during the recent drop in stock market values. Many of them were handling their investments; others had lost faith in their current financial advisor. What they had in common was the realization that what may have done well for them during the recent 11-year bull market was not holding up during the COVID-19 pandemic.
After reviewing their portfolios, I discovered things like unnecessary fees, a lack of diversification, and, sometimes, over-diversification. One person who thought he was well-diversified owned five different S&P 500 Index Funds. There is a right amount of diversification merely owning an index fund, but there is not further diversification from holding multiple funds tracking the same index. To matters worse, he held the funds at five different companies, which added to his fees and made tracking everything more of a hassle.
Even the best portfolio can use a little tune-up every so often. You may need to adjust your contribution amounts to take advantage of higher retirement plan contribution limits for 2020. The current market volatility may provide you with some excellent tax-loss harvesting opportunities. For those who don't utilize automatic rebalancing on your accounts, it may be time to reset your investment allocations to match your current goals and time frames.
Believe your beliefs and doubt your doubts
The Coronavirus is scary. Our lives are being changed in ways most of us have never seen before. From what I've seen, the people who have long-term financial plans, own well-diversified portfolios, and are still able to earn an income are much better positioned to ride out this storm. Even among those who have lost their profits, people who have a financial plan and are prepared for when life happens are going to have a much easier time bouncing back from the COVID-19 lockdown. Franklin Templeton suggested, "When putting to the test, you sometimes begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long-term goals."
Don't forget the balance sheet
An often-overlooked shred of information when the good times are rolling is balance sheets. In times of crisis, though, this vital metric becomes even more critical. Companies with inadequate cash on hand and sizable sums of debt lack the flexibility needed to navigate disruption.
To that end, while big tech firms like Microsoft and Amazon were hot stocks in the last decade for their fast and steady revenue growth, they should remain top picks now because of their stable financial positioning. At the end of 2019, Microsoft had cash, equivalents, and short-term investments net of long-term debt totalling $70.9 billion. Amazon was in a similarly enviable position with $31.6 billion in net cash and short-term investments.
Paired with a company's enduring ability to generate growth, a strong balance sheet means a business can remain nimble when an economic crunch hits and continue to make investments for long-term expansion.
Free cash flow and margin
Finally, there's the bottom line. Rather than use basic earnings per share, though, free cash flow (revenue less cash operating and capital expenses, excluding non-cash expenses like depreciation and amortization) is a much better measure of a company's actual ability to generate profit. I'll pick Netflix (NASDAQ: NFLX). The leader in streaming entertainment has been one of the biggest winners of the last decade and had 167 million paying subscribers at the end of 2019. Resulting revenue increased by 28%.
However, content creation to pick up all those new subscribers is costly, and Netflix was running free cash flow negative for years -- negative $3.14 billion in 2019 to be exact. That was good for a negative free cash flow margin (free cash generation divided by revenue) of negative 15.5%. For a company already so large, that's a lot of cash burn, shortfalls that Netflix has been making up via issuing new debt. At the end of the year, the company had $14.8 billion in long-term liabilities and $5.02 billion in cash and equivalents.
This is but one example, and free cash flow is only one metric. But it's an important one that directly feeds into a business's balance sheet and ability to sustain expansion. It's going to take a big hit to the bottom line with the temporary closure of its theme parks and massive spending to get its streaming service up to speed. Still, I prefer Disney (NYSE: DIS) as a long-term entertainment stock because of its track record of positive cash generation with its vertically integrated business.
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How To Buy Stocks After Coronavirus Crash?
When trying to decide when to buy stocks like Apple, Microsoft, and Tesla again, the key is to stay patient. Rome wasn't rebuilt in a day.
Stay patient and wait for a follow-through day to signal that it's time to test the waters again. But don't jump in headfirst. Get back into the stock market gradually. If the nascent rally takes hold, incrementally buy more shares. If the new uptrend fails, you can get out without putting too much money at risk.
This also applies to promising IPO stocks like Zoom Video Communications (Z.M.). IPO stocks have a history of being volatile, and that's especially true during periods even less erratic than the coronavirus stock market.
The best way to profit in the next uptrend is to stay patient in the current downtrend. Instead of reacting to the latest headline, focus on stock charts for the market indexes and leading stocks. Stock charts will help you weed out the noise and discover what matters in the stock market.