Editor’s note: The market panic over the coronavirus outbreak is showing no signs of slowing…
This morning, the S&P 500 plunged more than 7%… triggering the market’s “circuit breaker” and briefly halting trading for the second time this week. And all the major indexes suffered their worst losses since 1987.
But while other investors panic, we’re looking for ways to prepare and profit. That’s why today, we’re turning once again to longtime Casey Research analyst Andrey Dashkov. As he told you on Tuesday, he learned how to handle a financial crisis from his time in Belarus.
Below, he shows how history can signal the right time to buy during an epidemic… and where we should be looking to pick up quality assets on the cheap…
By Andrey Dashkov, analyst, Casey Research
The coronavirus outbreak that’s gripping the markets has the marks of both something that’s happened before, and a new problem altogether.
At first, global markets had mixed reactions to the outbreak, which started in China. Then, they ignored it and hit all-time highs.
Now, they’re selling off. As of writing, the European and US markets are suffering a correction that looks like the crisis of 2008.
Over the past few days, I told you about how I started working for Casey Research in 2007… just before the ’08 financial crisis hit.
I wanted to introduce you to Special Situations – corners of the market that Wall Street will always overlook. Hidden investment gems that are within reach, but seldom talked about.
But things have been feeling similar to just before that ’08 crash. So before I could introduce you to Special Situations in good conscience, I wanted to make sure you had the best information available, so you could be defensive, too.
And now that you’re armed with this information, let’s see if the coronavirus outbreak qualifies as a Special Situation… and how you should approach this panic…
How to Spot a Special Situation
Special Situations come in all shapes and sizes. In essence, a Special Situation happens when a trend breaks. Or when external forces distort the market’s normal pricing mechanism.
These are some of the signs you want to look out for to identify a Special Situation:
Fundamental disruption. Past patterns will halt, at least temporarily. Growth rates will change (go up or down swiftly), press releases will point at deep fundamental changes, and valuations will break multi-year trading ranges.
Lack of information. Put simply, the market shows that it’s confused about how much something is worth. Major indexes or company prices will trade sideways and swing wildly before they settle on a level that, in their opinion, reflects all the changes that took place.
Volatility. The way the market will “feel” its way toward a fair price will be through a series of wild overshoots and undershoots. This volatility is when you should look out for an opportunity. And by the way, it may last for months.
Bargains. You’ll be able to pick up assets at excellent prices, because the market will stay on the fence about the value of a company or an index.
Does coronavirus have these features?
Fundamental disruption. It definitely is disrupting the fundamental workings of the global economy. The global supply chain has been in a state of chaos. In China, the situation has improved, but as the virus spreads globally, more countries will feel the effects. Check.
Lack of information. Information coming out of China (and the U.S. government) has been low-quality. As a result, investors are grasping for any hints of potential danger to the global economy, and trying to figure out what to do. The S&P 500 is having one of the worst weeks since 2008 because selling stocks looked like the most obvious solution to many. Stocks have hit a “circuit breaker” (that halts trading if the market falls 7% or more) twice this week. Check.
Volatility. The market’s volatility gauge, the CBOE Volatility Index (VIX), is at a five-year high as of writing. Check.
Bargains. Major indexes are in retreat. The S&P 500 has given up all its gains since the end of 2018. Check.
What to Do?
First, expect further rate cuts and stimuli from global governments. They’ll try to do what they can to fight a coronavirus-borne recession – not that they will succeed.
Second, the spread of the virus will continue, and the situation will get worse before it eventually gets better. So brace for more volatility…
Third, the oil price war that Saudi Arabia and Russia started can easily last a year or more. Russia has enough government reserves to last several years. Evaluate your energy holdings and see if they have what it takes to survive an extended period of oil at $30 per barrel.
Fourth, global GDP growth will likely slow from about 2.7% to about 2.2% this year. Cyclical industries, like discretionary goods or gambling, will have a tough time.
Credit Suisse says that during past epidemics, the right time to buy was between one week and one month after daily infection numbers peaked. Currently, there are over 120,000 people infected across the world.
In the meantime, consider picking up some quality companies at bargain prices. Here is a list of 20 stocks whose valuation (as measured by the popular valuation metric, EV/EBITDA ratio) dropped by 80% or more compared to their five-year highs.
[EV stands for “enterprise value.” It is the sum of the market value of a company’s debt and equity, minus its cash. EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.” A lower EV/EBITDA ratio usually indicates a cheaper, more valuable stock.]
|Company||Symbol||Dividend Yield||5-Year High EV/EBITDA||Current EV/EBITDA||Valuation Drop|
|American International Group||AIG||3.9%||244.6x||5.9x||-98%|
|Cabot Oil & Gas||COG||2.5%||31.1x||4.8x||-85%|
|The Kraft Heinz Company||KHC||6.8%||45.5x||7.2x||-84%|
Source: Capital IQ
These are some of the panic bargains that you should have on your radar.
Stay safe, and good investing,
Analyst, Casey Research