When I was entering into adolescence in the late 80s and the early 90s, there was a big push to "Buy American." This was a reaction to what the American collective feared would be global domination by the Japanese; visions of Samurai hordes driving Hondas were the stuff of nightmares from Main Street to Wall Street. "But," the American consumer whispered quietly, "...what if, you know, our cars here just suck?"
Fast forward a few decades and a lot has changed. Fears of Japanese global economic dominance have long faded; movies like "Rising Sun" seem about as relevant today as its main actor Wesley Snipes (the only thing that remains the same is that, perverse as it is, Sean Connery remains a sex symbol--although the coronavirus might change that in a hurry).
"Is that you, Miss Moneypenny?"
"No, Mr. Connery; I'm the priest."
Sun Sets in the East, Rises Further East
As the sun set on Nippon only to rise further East (or a lot more West -- this is a metaphor, and the world is round, and the coronavirus is not a cold, moron), suddenly Sinophobia gripped the world as China became a global economic powerhouse. But something else changed, too:
"American" cars (there are Honda plants in LA and Chrysler plants in Europe), began not to suck so bad. Then, the 2008 crash and recession came and they need a bailout. Obama, much to the chagrin of many Republicans, obliged. They not only paid back the loans, they thrived.
While there are better American stock buys right now, even American car companies, including the struggling cash-poor Ford, are a buy at these levels. They got bailed out once they will be bailed out again: Ford (NYSE: F), General Motors (NYSE: GM), Fiat Chrysler (NYSE: FCAU), and Tesla (Nasdaq: TSLA). Tesla is an insanely good buy at these levels, and concerns over ensuing investigations regarding autopilot crashes will, if anything, only partially slow this stock's acceleration back up to $900 per share where it was from less than $500 per share where it trades now. Taking the long view, Tesla is the future and, with accidents in the tens of thousands per year, so are self-driving cars. There will be no justification to drive even an electric car with human hands in the coming decades. Shorter-term, CEO Elon Musk, has offered to turn his manufacturing capacity towards building much-needed ventilators and medical equipment; Ford and General Motors, who have closed Detroit and aren't making more cars, are already in talks with the White House to do just that. With their stock prices cut in half, these are all buys.
Buys and holds, of course: We are not going to get out of this recession anytime soon and the automobile industry is going to be devastated. To wit: RBC said its new forecast for global automotive production will be down 16% “from a demand perspective,” including retail sales in the world's largest automobile market, China, where sales have been cut in half so far this year.
Yes, Chrysler is really a European company, an Italian-American multinational, headquartered in London. But it'd be nice to invest in Italy also -- especially the hospital bed market -- low on supply, high on demand, am I right? In all seriousness, we are two weeks away from looking like Italy if we do not shut everything down...now.
Buy American, But Don't Leave the Homestead to Do It
As the virus spreads, social distancing is finally being taken seriously in the U.S. this week (I've been in the woods for a while now). The NYSE will implement fully electronic trading by Monday. New York City will convert hotels into hospitals to treat minor injuries to shore up beds in hospitals for virus victims. California has a shelter in place lockdown, and New York is flirting with doing the same.
We are two weeks behind, of course, and we squandered any opportunity we had to stop the virus in its tracks or at least immediately and substanitially flatten the curve of infection. I predict that we are two weeks away from an Italy-level situation.The more we can finally test, the sicker we know we are.
As for the health of the market, we are near a bottom here; I do not see the Dow going under 18,500. The good news is that we have seen the Fear Index (VIX) resistant at going higher than it has earlier in the week. The market has started to flatten, and this is what we need iin what is the beginning of a recession unlike any we have ever had, a downturn propagated by a microscopic menace whose reign of terror is as of now open-ended. What we do know is that it will get worse before it gets better. Finally, even con-man turned hero-hopeful Trump gets it as of this week. I think he realized that if he beats the virus, or begins to flatten the rate of infection, he will win re-election and the weeks he spent not taking this seriously while the virus silently spread will be all but forgotten.
The "Spanish" Flu Was From Kansas
Of course, just when he sounds like a real president, Trump lashes out and blames someone. He can't help it, so he calls it a "Chinese" or a "foreign" virus. But he isn't the only one paying the blame game: Conspiracy theories about who and for what purpose developed the virus are spreading as rapidly as the disease itself. In French media, the American military is often cited as the source of the virus, a theory first peddled by Zhao Lijian, a Ministry of Foreign Affairs spokesman, who was rightfully reprimanded later by Beijing. A contrasting conspiracy theory in America is that the Chinese invented the virus at the Wuhan Institute for Virology, and released it, intentionally or by accident, on the public as a bioweapon.
This needs to end as it is unhelpful as it is stupid. The origination of COVID-19 is not a conspiracy, not by America or China or some pedophile pizza joint run by Hillary Clinton. It is just a product of evolution. That said, after we survive all of this, we may think twice about eating meat -- let alone butchering different kinds of animals in the same unsanitary spot. As an illustration of my fair-mindedness, the first recorded case of early 20th Century “Spanish” flu was first recorded in Kansas, where I assume they take their bat deep-fried.
We're Asking You to Stay off the Beach, Not Take a Beachhead
Pershing Square’s investor Bill Ackman made headlines this week in his call to shut the country down entirely for one month. Call it an "extended spring break" for a month, he said. In light of China having just released they saw no new local infections, we need to take serious measures and shut everything down for one month. So for those kids in Florida at the beach, go Netflix and chill for a month inside. If our grandfathers stormed the beaches at Normandy and the Philippines, you can play video games and send photos of your genitals to one another for a few weeks to save hundreds of thousands of lives and give the healthcare system a break. If we take half measures, not only will more people die, but so will more companies.
Cash, Not Stock Buybacks, is King
As Ackman pointed out, many companies will not survive (or will be very hard-hit) losing revenues one month let alone three or six or 12. Some companies don't even have enough cash to last them through a regular length spring break, let alone an extended one.
Big companies have done a bad job with their balance sheet. Instead of saving cash, they spent all of it on buying back more stock. Two critical questions investors need to ask when it comes to companies who will lose revenues during the deep recession are:
1) How much cash do they have?
2) How big is their credit line?
McDonald’s (NYSE: MCD) has a balance sheet about as appetizing as one of its "salads." With $21.1 billion in revenue last year, it ended 2019 with only $898.5 million in cash on its balance sheet, a little more than two weeks’ worth of sales. McDonald's has more than 2,600 stores, franchises 36,000 and more than 205,000 people employees. IT generated $5.7 billion in free cash flow last year. Instead of banking it, McDonald's bought back $4.9 billion worth of stock in 2019 and paid another $3.6 billion for its dividend, almost exactly the $3.24 billion the company borrowed last year. It added $1 billion a year to the company’s $34.1 billion in debt. However, McDonald’s does have a $3.5 billion credit facility, so it can ride out the storm. And while it has broken the first rule of personal finance -- and has underperformed the S&P 500 index over the past eight years, this great American company has fallen so far so fast and is trending upwards the last two days -- at these levels, it is a buy. So too is Starbucks (Nasdaq: SBUX), another stock buyback sinner whose stock has been nearly halved. With $26.5 billion in sales last year, it has $2.76 billion in cash, or about six weeks worth of expenses. It made $3.24 billion in free cash flow while spending $10.2 billion on buybacks and another $1.76 billion on dividends, giving shares a 2.6% yield at a stock price that’s down about 37% this year.
And yet, Starbucks at this level is a buy. Some of their stores in China are reopening now as China beats down the virus and gets back to work.
However, other companies that played fast and loose with cash won't make it out of this ensuing depression. Except for those companies that the government will always bail out, like American Airlines (Nasdaq: AAL), whose stock has fallen further since it was a last week "buy" but has now found its floor. And even if it hasn't bottomed, it will still be double or triple in a year. But if you really want a stock that the U.S. government will never let go bust, buy the cash struggling, nearly incompetent Boeing (NYSE: BA) whose stock, at about $99 per share, has lost a third of its value in a month. Boeing is as close to a China-type government-owned company as we get in America, a retirement program for defense contractors that will never, ever, go bust. On another note, I said to short Expedia and Booking.com last week and if you didn't, you should have.
More Fast Food to Go Long On
Like McDonald’s, it is time to invest in all American fast-food garbage like Wendy’s (Nasdaq: WEN) and Dunkin' Donuts (Nasdaq: DNKN), both companies boosting their delivery services to go hungry, cooped up Americans looking to eat as unhealthy as they were before minus any exercise. Domino's (NYSE: DPZ) is the obvious play here, and while I am a bit late on this one, its stock will still rise, especially on the company's plans to hire 100,000 new workers to meet delivery demand. Wendy's stock has been halved and Dunkin' has also been eviscerated in the markets. Those are enthusiastic buys. My favorite stock in this space, however, is the more diversified Restaurant Brands International Inc. (NYSE QSR), which owns multiple companies including Burger King, etc. More diversified, it will be hit harder by the virus downtown but it has bottomed out as a stock and is trading upwards. This stock will double by the end of the year and possibly by September.
Buy Great American Stores -- Online and Off
I have long said to stick with Amazon (Nasdaq: AMZN) despite its trading at such a high P/E and that it will be safe short and long term.
Amazon is hiring 100,000 workers to deal with the boom in online sales. I said to buy it on Feb. 28 at $1,832 per share, and that it will have ups and downs, but to hold it until it at least goes back to pre-virus levels. After falling a week or so ago, it is now trading around a little higher per share as of midday Thursday. It will not see a fall the way many predicted for any length of time.
Again, we can’t even know what earnings will look like because we don’t know how long this crisis will last -- all we have are common sense and history to guide us. Where will people get stuff during the crisis and where will they continue to get stuff after the crisis and more for the foreseeable future? Online. Amazon in America, like Alibaba (NYSE: BABA; HKEX: 9988) in China. Simple.
But it is also true that some retail will survive. Well, then what is the best capitalized retail giant that will only come out stronger, eating up more market share as other retailers fail and do not survive the crises? Walmart (NYSE: WMT) -- this is one of the big stocks I am interested in that hasn't crashed in the last month. Part of its stability is due to its smartly moving much of its business online. Anecdotally, about half of the stuff I order off the internet during this lockdown is from Amazon, the other half from Walmart. But of all big American retailers, Home Depot (NYSE: HD), whose stock has been nearly cut in half, is the best buy. Oh, and you should also buy Best Buy (Nasdaq: BBY).
Never Waste a Crisis
Such was the advice of Winston Churchill. He also famously said: "You can always count on Americans to do the right thing -- after they've tried everything else."
It is time to prove that adage wrong, and do the right thing now and SHUT THIS COUNTRY DOWN.
And in isolation, we can spend time hoping our companies survive while investing only in the ones we know will. If all was lost and America fell into total chaos, ask yourself as an investor: What would be left? The answer is fast food, the internet, Walmart, and of course, Starbucks.
We will get through this recession. And this time, as we do, we need to make sure we help out the little guy too, and not just provide money for more stock buybacks and corporate bonuses. If American capitalism finds a balance this time around, it will be saved. If we repeat what we did in 2008, the nation will be doomed, no matter what the market does.
Capisce? Now go inside and stay the F@#! off the beach.