During the March 2020 stock market crash, I bought stocks as I believed such a panic could create opportunities. I've been nibbling at some of my positions during the following rally to get some cash ready for the next decline. It's very well possible this next decline just started, who knows. If so, I'm prepared with a list. I will put a price at which I'm considering buying these companies; I do this so I can buy without emotion when the correction finally comes.
These picks are ordered alphabetically. I don't have a specific preference for one stock or another. They are only connected by my conviction I should buy or add more when they get cheap enough. Some of these stocks could be hard-hit due to the coronavirus or lockdowns. Most of them will be impacted by the economic downturn as well.
I want to look past these temporary problems and buy companies that will last for the next 10 years or longer. This pandemic will pass one way or another. Humanity adapted itself to difficult situations before and will do so again.
To value these companies, I'll include PE ratios and EV to EBITDA ratios. I also include the EV to EBITDA because it's sometimes more complete. EV or enterprise value equals the market cap, including the net debt or deducting net cash. The EBITDA is the most comparable because it excludes all one-time write-offs, etc.
AbbVie Inc. (ABBV)
AbbVie is a large pharmaceutical company with a diverse portfolio of therapies that have an impact on people's lives. It recently acquired Allergan to grow further. This acquisition was funded with debt and shares. The larger debt could make the stock more volatile. This shouldn't be a problem because the cash flows are consistent and should remain so even through a recession. The extra volatility could offer a nice entry point.
I wanted to pick at least one of the largest pharma companies. Most of the pharma business is recession-proof. This is one of the few sectors that doesn't need to make big changes to their forecasts. I believe AbbVie is decently priced, offers a nice dividend rate and good prospects. Nicholas Ward recently wrote an interesting piece about AbbVie and Bristol-Myers Squibb (BMY) that could provide more insight.
Alphabet (GOOG, GOOGL)
The parent company of Google and YouTube has been a long-term growth company. The coronavirus impact on advertising wasn't that big in the first quarter. In an article published in April, I explained why I believe Alphabet will be a long-term winner. The rush on internet services has been increased. Alphabet is successfully diversifying its income away from advertising with cloud services. Every drop below $1,200 would present an opportunity for me.
Financially, Alphabet is in a very strong position. It has a huge cash pile of $117,229 according to the first-quarter results. There is almost no debt on the balance. This means it has more than enough room to overcome a couple of difficult quarters and could seize opportunities if presented.
If we look at the valuation today, Alphabet is valued around the same level as the past couple of years. This should still be a fair value considering the growth possibilities this company has. I've included the classic PE ratio and EV to EBITDA:
Booking Holdings (BKNG)
Booking runs a couple of popular travel websites. It operates under these primary brands: Booking.com, KAYAK, Priceline, Agoda, Rentalcars.com, and OpenTable. Traveling is something we had to cancel and postpone during the lockdowns. This affects the current quarter results.
There were some secular trends in favor of Booking that remain. Online bookings are on the rise and are expected to keep gaining market share. This won't change during this crisis. People stuck at home could be looking more online than before. Additional services like last-minute cancellations will make the online booking platforms even more attractive.
Results will deteriorate in the short term. The crisis stimulates exciting trends towards online booking further. Booking should be able to turn this crisis into an opportunity. It has a solid balance and has been a growing free cash flow machine. As shown above, the share price increased nicely over the past 10 years. The valuation, on the other hand, remains attractive:
An interesting read on Booking Holdings is done by Rob Barnett.
Broadcom is a semiconductor and enterprise software company. It built a broad portfolio with debt-funded acquisitions. Lately, these acquisitions focused on enterprise software. This should make the results more consistent as semiconductors are a cyclical business. While doing these acquisitions, Broadcom also increased its dividend quickly. It's more volatile due to the high debt position. But in recent results, it proved coronavirus doesn't have a lot of impact on the company. It looks like quarter results could fluctuate a bit more and some revenue could move from one quarter to the next. This keeps my long-term thesis intact: it's a successful serial acquirer.
The PE ratio isn't a clear indicator of Broadcom's value. The recent acquisitions are written off quickly. This increases deprecation and consequently reduces net earnings. Cash flows and EBITDA give a better view of the valuation.
Microsoft is probably one of the few companies that could win extra revenue from the pandemic. There is an increased demand for a lot of its services. Forced work from home increases the bid for cloud services. The Xbox offers exposure to the gaming business. Microsoft was already on the road of strong growth. Now, it's on a highway.
Microsoft's excellent results were rewarded on the stock market as well. The valuation is higher than before. I expect this will remain, so there is no getting around Microsoft. Like many other tech names, there is still plenty of gas in the tank for this stock. Any possibility to buy it a lower valuation than today could be a good entry point. As pointed out by Toni Nasr in his article, Microsoft is very profitable and offers excellent growth.
Take-Two Interactive (TTWO)
Take-Two is a leading developer, publisher, and marketer of games. It launched some major game series like the GTA franchise, Red Dead Redemption, and NBA 2K. It also has a division with mobile games and sells in-game content. This has made income more recurrent. Results are still dependent on large releases. Gaming is unaffected by the coronavirus. People have more time to game and more people are starting to play as well.
Even today, hovering around the all-time high after it recovered quickly from the March lows, it doesn't look overvalued to the past. Considering the growth possibilities gaming companies still have, this is attractive to get into as pointed out by Simple Investment Ideas.
The Cheesecake Factory (CAKE)
I wrote two articles about CAKE this year. In January, I argued that it had great growth prospects because of the adding of new restaurant units. CAKE recently acquired FRC and this opened up new possibilities. Then, of course, the coronavirus kicked in and changed the short-term thesis dramatically. Restaurants were closed and switched to off-premise sales only.
So recently, I wrote a second article about how CAKE will cope with the coronavirus. The FRC acquisition became unfortunate because of the additional debt and CAKE had to attract new capital in the form of preferred shares. It adapted most of its restaurants to takeaway-only during the lockdowns. This works pretty well. CAKE has enough cash to survive the crisis and even seize opportunities. It proved in previous recessions it can adapt quickly to a tough situation.
I hope this list guides you to possible opportunities during a stock market decline. I believe it helps to have these lists before the opportunity presents itself. The stock market crash in March recovered very fast and I'm sure almost every investor missed opportunities he/she wanted to take. This kind of preparation helps to avoid this. Be inspired to make your list for the next correction and feel free to share it!
This list isn't complete and can be argued about. I wanted to make it diversified without losing focus. I tried to focus on quality with good management and a great long-term perspective. There are a lot of uncovered sectors in this list that could be interesting as well. I have to make choices as my cash is limited as well.