A quick covid-19 market update. Ever since US got it’s first case of covid-19 (corona virus) as well as it’s first confirmed death related to covid-19, the market fell into jitters and had the worst drop in S&P since 2008 Financial Crisis of more than 12% in a week!
As a value investor, you would have allocated around 25% or more in cash for this kind of event to buy into the market, just when most are fearful. Some might be thinking, the market may fall more in the coming weeks, wouldn’t this be too early to enter?
I personally have 2 views for the current market. 1) We can’t time the bottom. 2) Market has over-reacted to the panic of the virus where the business and economic fundamentals have not deteriorated to warrant the extend of the market drop.
In addition, I also feel that the recovery will be V-shaped, hence sitting out for the market to drop further might result in missing the time to enter the market. Buy into necessity stocks like infrastructure REITs, transport or healthcare with good fundamentals (ROE & ROA > 15%, pays out dividends, zero or minimum debt, profit margins of >40%, consistent and growing EPS over the last 10 years) and you should be sitting to double your portfolio by the end of 2020. If you’re aggressive (like myself) and see that tourism will also rebound sharply with increased tourism spend globally to make up for the lost opportunity in first half of 2020 (yes, I expect the virus effect to wear off in 6 months time), you can consider airlines (not recommended as it is a very competitive and razor thin margins industry) as well as IT tourism (e.g. Expedia).
Here’s my list of US stocks that I’m considering to take position in and their reasons.
- Corporate Office Properties Trust (OFC)
- CISCO (CSCO)
- Southwest Airines (LUV)
- Kon Ferry (KFY)
1) Corporate Office Properties Trust is a REIT that owns, manages, leases, develops and selectively acquires office and data center properties. The majority of its portfolio is in locations that support the United States Government and its contractors, most of whom are engaged in national security, defense and information technology related activities servicing what it believes are growing, durable, priority missions, making up the core of 88% portfolio. The remaining 12% is portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics.
My assessment of its intrinsic value is at US$26.6, a low since dec 2018 and may 2016. With a forward dividend yield of 4.15%, it seems like a stable stock that I can stick with and go through this “recession” with. However to really apply the full value investing’s margin of safety, you may want to look at entering after it dips below US$18.6, a price not breached since Sep 2003!
2) Cisco Systems, Inc (CSCO) designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry. It innovates cellular IoT connectivity management with 5G readiness and machine learning, which makes me feel that it is ready for the next stage of growth, albeit being discounted due to poor overall market sentiments.
My intrinsic value calculation for CSCO is at US$29.7 and with share price currently at US$39.9, there is more room for further decline. However, should the covid-19 pandemic be short-lived, Cisco Systems won’t be within our radar as it’s P/E will be way above 15.
3) As I mentioned earlier that I believe tourism will bounce back sharply after the Covid19 virus settles, I’ve selected an airline company to look into – Southwest Airlines (one that Buffet also bought into). Take a look at the following earnings per share (EPS), gross margin, operating cash flow, free cash flow, ROE and ROA and debt/equity charts and you’ll understand why we like Southwest Airlines.
I am pretty share Buffet have an influence over it’s declining debt/equity ratio for LUV too. So with these good financial fundamentals, I felt that LUV had been overly bad beaten up by the market. Even with a conservative 40% margin of safety, my entry price comes up to US$40.9, near tothe current market price of US$46. Therefore, there should be good room for capital appreciation once the fear of covid-19 subsided.
4) Lastly, Korn/Ferry International (KFY), known for their business in Executive Search, Advisory, and RPO (Recruitment Process Outsourcing) & Professional Search. During recession, the executive and professional search business usually takes a hit as there are more retrenchment than placement. However, as it is a relatively cash rich company (with US$626m as at 29 April 2019), I’ve assessed KFY’s intrinsic value at US$53. At it’s current share price of US$34.8, there is more than 30% additional safety of margin. With that said, I am assuming that the covid-19 impact does not last more than 6 months and that the overall general economy picks up to be stronger than it started the year with and continued low unemployment rate towards the second half of 2020 to pull the full year financials up and beating the market estimates. If your assumptions are not as optimistic as mine, then perhaps you can continue to observe the stock and enter one month later.
As with every crisis, opportunities abound. I believe that this is a much awaited opportunity that the market had been waiting for in the last 10 years. I hope my sharing above helped to give some direction on the better fundamental companies to investigate further into and let’s continue to prosper from the market once covid 19 panic dies off! Huat ah!!