Investors have taken big losses over the past month as the coronavirus panicked investors and ground the economy to a virtual standstill.
For most investors, the best thing to do in a market panic is nothing. While this is definitely the fastest we’ve gone from record highs to down more than 20% in major stock indices (the definition of a bear market), it isn’t the first time. In fact, major indices lost close to 50% of their value in 2000 and in 2008 and came back to set new highs just a few years later.
Obviously, not everyone has that kind of time horizon, and individual stocks don’t always come back that fast, but for most people with a broadly diversified portfolio, these events are scary, but not necessarily catastrophic.
That said, the economy and stock market are both in very different places than they were just a few weeks ago. InvestorsObserver's analysts have been watching and studying to try to keep up with rapidly changing conditions. We’ve divided the 146 industries we follow in several categories to reflect what we see as major themes in the market: Defensive, Health Care, Quarantine Plays, Bailout Bets, Deep Value or Dead Money and Unknowns.
We’re writing summaries of why different industries fall into a particular group and will be posting them here over the rest of the week. We may not mention every industry, as we’re not sure that they all require comment.
There’s a lot going on, and obviously the situation is pretty fluid, so things may change, but if we move anything to a new category, we’ll write about it here and let you know.
Updates for March 24
Updates as of March 19
Updates as of March 18
Defensive
We’re not expecting huge gains from this group, but we’re not expecting big losses either. These are stocks we expect to be less volatile than some other parts of the market. Many of them also pay dividends, which is an added bonus.
Household and Personal Products
This sector isn't glamorous in normal markets, but the products made by this group, which includes Procter & Gamble (PG) and Colgate Palmolive (CL), such as toothpaste, toilet paper and other essentials are the kinds of things people stocked up on as they prepared for quarantine. That bulk toilet-paper buying likely won't have much long-term effect on these stocks, it just moves purchases forward and will result in a few less sales in the coming weeks, but if you see lines of people waiting to buy something on TV, it's a good sign that demand for a product is strong, which is what you want in an economic situation where demand for huge chunks of the economy is being destroyed.
Packaged Foods
Packaged Foods seems likely to get a bump from people staying home. Some dollars that would normally get spent in restaurants are likely going to be spent on frozen or canned foods as people practice social distancing. Campbells Soup (CPB) and General Mills (GIS) are among the giants in this group, but there are lots of household names here, making everything from soup and cereal to snack foods.
Grocery Stores
Consumers are cutting back on a lot of spending, but grocery stores aren't likely falling victim to that. Everyone needs to eat. They may actually see increased spending as people stay in an cook instead of going to restaurants. Kroger (KR) is a household name in much of the U.S., but Ahold Delhaize (ADRNY) is the company behind Food Lion, Hannafords and number of other U.S. stores.
Pharmaceutical Retailers
Pharmaceutical Retailers are the bridge between the Pharma industry and the population in desperate need of their medications and other medical supplies. This is an example of inelastic demand, as people are going to need medicine even while they may avoid making other purchases in an effort to limit social contact.
Health Care
We’re in the middle of a national health emergency. Our goal here isn’t to try to pinpoint the stocks that’s going to cure coronavirus, but this seems another place that investors should be able to expect lower downside risks in the current environment.
Biotechnology
There is currently a global scramble to find improved tests and treatment for the Covid-19 virus, in addition to a number of companies working toward developing a vaccine. Not all of these will work, which makes this industry a bit more speculative than some others in the Health Care group, but it is possible that the work on this outbreak will lead to technologies that could be used for other things as well. We also expect there to be some big winners here as there is high global demand, and returns, for companies that can provide reliable testing and a vaccine.
Medical Instruments & Supplies
Medical Instruments & Supplies are facing drastically increased demand as global markets are experiencing a shortage of many medical necessities, including simple items like masks and gloves and more complicated devices like respirators. There will be increases in production of these products across the world, whether through government intervention or market demand, and we can expect to see this industry outperform the market as long as the pandemic lasts.
Diagnostics & Research
The Diagnostic & Research industry makes this list based on a massive influx in demand as swarms of people around the country and globe are getting tested for the coronavirus. We can expect to see a large increase in demand over the coming months followed by a decrease in demand that will signal the worst is behind us as we return to normal levels.
Medical Distribution
The Medical Distribution industry is also seeing increased demand alongside many medical industries. This demand will increase, peak, and decrease with the number of infected patients, but this is a global pandemic, so the increased level of demand seems likely to persist for a while.
Medical Care Facilities
Medical Devices
Pharmaceuticals
Quarantine Plays
Large parts of the economy are closed. Bars, restaurants, casinos, all shutdown for seemingly at least the next two weeks. This doesn’t people are going to sit at home and stare at the wall, they’ll find other things to do, both with their leisure time, and for many workers (InvestorsObserver analyst included) their work time. These are the companies we expect to benefit from this situation. It is likely that some consumer behavior will shift even after the pandemic is over. People might find a new TV show, or decide that maybe decide that not every meeting needs to be held with everyone in the same room, so some of these stocks are likely to have some staying power going forward.
Education & Training Services
The Education & Training Services industry is already experiencing drastic increases in demand. This is because schools across the country and world are closing down and relying on this industry in order to continue educating students. This demand may fade just as quickly as it came, as once schools open doors again there will be significantly decreased demand for these products. Some tools may be able to prove their use to teachers and professors and see sustained growth during the aftermath of the pandemic, however this group will likely fade a bit once the pandemic is over.
Internet Content & Information
Internet Content & Information is a Quarantine Play because there will be tons more internet usage-per-person as people are working from home, attending school online, and staying home due to pandemic worries. You can expect to see these companies have increased demand for a short while. This may decrease over time however as people return to their regular lives. It's hard to know quarantine habits people may hang on to after this is over though, so there could be some long-term winners here.
Electronic Gaming & Multimedia
Electronic Gaming & Multimedia will experience made the Quarantine Plays list because people will need something to pass the time and Netflix (NFLX) and Sony Playstations (SNE), among others, will see increased demand. Depending on how bad things get, however, we could see a reversal here as people will have less disposable income the longer they are limited to their homes. Spending in this industry will be boosted if parts of the economic stimulus package includes cash payouts to the population.
Bailout Bets
A more speculative set to stocks to be sure. These are industries that have been hit hard by the panic, and will almost certainly need funding from the government to recover. There’s extra risk here because not only are these stocks dependent on Congress, but the outcome for shareholders could vary based on Congress decides to help.
Airlines
The Airline industry is probably the hardest-hit industry in the market. Even the airline giants like Delta Air Lines (DAL) and Southwest Airlines (LUV), are on bailout watch for the time being as the COVID-19 pandemic is causing drastically decreased demand, lowered prices, and that's for routes not affected by travel bans that a number of countries have enacted.
Aerospace & Defense
The Aerospace & Defense industry is seeing hard times, however select companies within this industry may perform better than others, even without a bailout. The Aerospace & Defense group is joining Airlines on the Bailout Bets list because of how correlated a healthy Airline industry is with a healthy Aerospace & Defense industry. The companies heavily exposed to commercial aviation, like Boeing (BA) and its suppliers, are going to need a lot more help than the companies that are closer to being closer to pure-play defense contractors like Lockheed (LMT).
Gambling, Leisure, Lodging, Resorts and Casinos, Travel Services
We're combing a lot of similar categories here on the Bailout Bets list due to a reliance on travel and large social gatherings. Social distancing, gathering size restraints, travel restrictions, and fear of sickness will continue to drive our decision-making process for the time being. We've already seen closures of facilities in Las Vegas from MGM Resorts (MGM) and Wynn (WYNN), and with the large number of sporting events canceled, even online gaming companies like Penn National Gaming (PENN) are being hit. Obviously the companies that own and operate sports and concert venues like Live Nation (LYV) aren't making money right now either. Some of these may move to another category once we get an idea of how bailouts are going to be structured.
Engineering & Construction
Building Products & Equipment, Industrial Distribution, and Tools & Accessories
Deep Value or Dead Money
These stocks could be great opportunities for investors to find incredible values, but some of them are also likely value traps. Things may move out of this category as government bailouts take shape, but as we said about Bailout Bets, the results for shareholders will depend on what form Congressional aid takes.
Oil & Gas Integrated
Some parts of energy sector find themselves in the Bailout Bets section, but for the biggest players, especially the giant multinationals like Exxon (XOM) and Chevron (CVX) this is a rough patch, but the companies will survive. Those fat dividends--Exxon at 10%-- may get reduced, but these companies have the scale and vertical integration to survive the twin shocks of a global pandemic and the oil-price war between Saudi Arabia and Russia.
Insurance - Life
The Insurance - Life industry found its place on the Deep Value or Dead Money list because of how they generate income. Life Insurance companies hold large reserves of money that they invest using a variety of strategies. Because this money is in various markets, which are more volatile than usual for the time being, these companies will likely see their stock prices drop to what may seem like attractive prices. The question here is how long they can make it with shrinking reserves and if the market will rally on the other side the crisis can re-inflate balance sheets.>/div>
