Many stock and bond markets have won back 50% or more of the fall wave that started at the beginning of the year by now. At the same time, we can see the major potential losses of the world economy from the coronavirus, as well as oil prices, which are at many-year lows, all this can raise doubts that the market “bottom” was finally established in March.
There is a popular belief that we will at least see a return to the levels that markets fell last month. This is evidenced by the results of surveys. About 50% of respondents are waiting for the March minimums to be updated before the end of the year 2020, and about 20% are waiting for their recurrence.
And now, such expectations have the right to exist, although they contradict the optimistic moods observed in many markets, which sometimes border on euphoria. Indeed, this year there is already an unprecedented failure of consumer and business activity caused by the pandemic and measures to combat it.
This threatens the most significant recession in the global economy since the Great Depression, as the IMF warned last week. The organization expects global GDP to decline by 3% in 2020, and this is much more than the losses of the previous world recession that occurred in 2009 as a result of the financial crisis. Then the global economy contracted at 0.8%.
In these conditions, the dividend payments of companies can be reduced, and this applies to the average values, that is, many companies simply refuse paying dividends or there is just nothing to pay from. In addition, some businesses will simply disappear, unable to withstand the negative trends in the economy caused by supply chain disruptions, falling consumer demand and other consequences of the pandemic.
Looking at the current levels of stock markets, especially the American one, it is difficult to understand how they take into account all of the above risks and, on the whole, rather gloomy prospects for corporate indicators and economic dynamics in general.
However, many investors believe that the current drop in oil prices is mainly technical in nature. The oil overstock that caused it is associated with the period of confrontation between producers that was observed before the conclusion of a new OPEC + agreement, and it only takes effect in May and shortly thereafter the agreement can reduce this imbalance and lead to stabilization of the oil market.
In addition, there is a fairly large group of investors and experts expecting a soon overcoming the peak in the spread of coronavirus pandemic in the world and the subsequent rapid removal of anti-pandemic restrictions. This should lead to a gradual economic recovery, which is already being incorporated into quotes for many risky assets, and especially stock ones.
Against the backdrop of enormous monetary stimulus measures from global central banks that created ultra-soft monetary conditions, markets should show strong growth, supporters of this scenario say. It is part of the V-shaped recovery model, or in the form of a Nike badge, the essence of which is the rapid failure and equally rapid growth of the global economy and quotes of risky assets. Similar dynamics was observed during the crisis of 2001 and 2008.
If, as the restrictions on the global pandemic are lifted, new outbreaks of the disease are observed, markets will realize that this problem will remain relevant for much longer than many optimists expected until an effective vaccine against coronavirus appears.
In this case, we can see another wave of sales of risky assets and global markets will experience a sharp decline. It does not necessarily lead to the rapid achievement of the lows that were set in March. However, in the event of a protracted crisis of the global economy, stock indicators are able to enter the phase of a long bearish trend, eventually dropping below the March lows.
Now both scenarios have too many flaws to have a high probability of implementation. Most likely, the situation in the global economy and in the markets will develop according to some “average” scenario. It will take into account the arguments of optimists, such as large monetary and fiscal incentives, which can be significantly expanded. But, most likely, in one way or another, the high risks of the second wave of the pandemic and the longer slowdown of the global economy are realized, which is not fully embedded in the current quotes of exchange-traded assets.
The spread of coronavirus has affected many people and companies in the United States. Most of the victims faced a decrease in earnings and the risk of dismissal. Many companies, in one way or another, suffer from a decrease in cash flow, some even face the risks of closing a business.
The S&P500 index fell by 35% from historical highs in March. Many stocks showed even more significant drawdown. But there are some shareholders that not only did not suffer from the spread of COVID-19, but have received profit. These are the shareholders of the companies discussed below.
The shares that have been growing since the beginning of the year.
- Moderna (MRNA). YTD + 164% growth from the beginning of the year. A biotechnology company with a capitalization of $14.4 billion. Demand for shares rose sharply after the company was one of the very first to announce the development of a vaccine against COVID-19. This biotech specializes in RNA biochemistry. MRNA entered the IPO in 2019 and has never been profitable. EBITDA, by the way, is also negative.
- ZOOM (ZM). YTD + 119%. Zoom Video Communications is a technology company with a capitalization of $42.2 billion, a developer of the same-name service for conducting online conferences. Shares rose sharply amid rising demand for remote conferences due to the spread of coronavirus and social restriction measures. The company makes a profit, revenue over the past year increased by 91%. But stocks look relatively expensive: LTM ratios P ​​/ E = 1500x, EV / EBITDA = 1409x.
- Tesla (TSLA). YTD + 67%. Mix of a new generation auto concern and an IT company of the energy business in the field of renewable energy. Tesla's business is associated with popular and promising technological trends, which explains the rapid growth of capitalization and the high valuation of its shares. The company's capitalization is $135 billion, more than that of BMW, Daimler and VW combined. LTM EV / EBITDA = 68x. Forward P / E ratio is 131x. And last year, the company became profitable, however, it is not known for how long.
- Netflix (NFLX). YTD + 35%. Streaming video service with a capitalization of $191 billion. The company presents films and series of both its own production and third-party suppliers. The number of subscribers in 2020 exceeded 170 million, most of them outside the United States. The company's profit is growing at double-digit rates and, according to Reuters consensus forecast, will continue to increase in the next 2-3 years. In the period of self-isolation, the demand for home entertainment and streaming services is showing rapid growth. According to the results of 2022, it is already expected $12.7 profit per share. True, along with the rapid growth of revenue and profits, so does debt. The Debt / Eq ratio is 2x. Long-term debt increased from $ 3.4 billion at the end of 2016 to $ 14.8 billion at the end of 2019. However, the Debt / EBITDA ratio remains below 1.5x.
- Amazon (AMZN) YTD + 29%. The largest online store in the United States and one of the most popular online shopping sites in the world. During the quarantine period, online stores and the delivery of goods are experiencing a renaissance. Amazon, unlike many other industries, does not lay off employees, but increases staff. Over the past couple of months, the number of employees has grown by more than 100 thousand. The company plans to hire another 75 thousand people in the near future. In financial terms, Amazon is also doing well. Revenue continues to grow at double-digit rates for more than a year. Over the past 12 months, this figure has grown by 19.5%. Earnings per share increased by 15%, to $23 in 2019. An important point of growth is the Amazon Web Services division, which provides cloud infrastructure services for IT companies. Amazon's debt burden is under control and is 1.7x in terms of Debt / EBITDA. The company cannot be called cheap. LTM P / E = 103x, EV / EBITDA = 32x. But the business continues to grow. According to the consensus forecast, according to the results of 2022, the company's profit is expected to reach $52 per share. And the forward P / E multiplier for the next 12 months is 80x.
- Gilead Science (GILD). YTD + 25%. This is a large biotechnology company with a capitalization of $103 billion and annual revenues of more than $22 billion. The company's stock growth since the beginning of the year is associated with the use of its drug for the treatment of COVID-19. A number of sources state that one of the drugs produced by the company against other viral diseases has worked well in the practice of treating a new disease. The first reports on the use of the drug came in February from China. In April, the University of Chicago gave a positive assessment of the effect of the drug. GILD multipliers cannot be called excessively high. LTM P / E is only 20x, forward P / E is 13.5x at all. But the company is saddled with a relatively high debt burden. Debt is comparable to equity, and in relation to annual EBITDA it is 3.25 times higher. Excluding the drug for treating COVID-19, forecasts for the company's revenue and profits in 2021 were very moderate: $ 22.5 billion in revenue and $ 5.14 per share on earnings. If the story with the use of the antiviral drug cannot be continued, in 2022 the company may show similar, unimpressive results.
- NVIDIA Corp (NVDA). YTD + 22%. NVIDIA is one of the leaders in the production of semiconductor chips for various purposes with a capitalization of $175 billion. The company began to show rapid growth in revenue and profits in 2015 in the wake of demand for NVIDIA video chips used in cryptocurrency mining. The second wave of demand actively supported the company's revenue, starting from 2017–2018. The produced chips and technologies began to be actively used in calculations using artificial intelligence, and it seems that the company is only at the beginning of a new technological trend. The first versions of the TESLA autopilot were also built on chips from NVIDIA. Excellent business prospects for NVIDIA are expressed in fairly high market valuations of the company's shares. LTM coefficient P / E = 65x, EV / EBITDA = 50x. But forward P / E is already 39x, which implies a significant profit growth in 2020.
- Microsoft (MSFT). YTD + 11%. Microsoft needs no introduction. The company's operating system remains the most popular in the world. Meanwhile, Microsoft has many more software products which popularity has grown significantly during the period of quarantine and remote work. It is also worth noting an important point in business growth - Microsoft Azure. This is a flexible cloud infrastructure for hosting IT projects of companies. Despite the gigantic size of a global corporation with a capitalization of $1.3 trillion, its revenue continues to grow at double-digit rates. Over the last fiscal year, the indicator increased by 14% to $134 billion, and earnings per share grew 1.3 times, to $5.06. At the end of 2020, the company's revenue may exceed $143 billion, and earnings per share of $5.67.
- Walmart (WMT). YTD + 9%. During the COVID-19 pandemic, there was a demand for essential products in all countries, including the United States. Grocery stores are one of the few that have not been quarantined in the last couple of months. In addition, in times of crisis for the economy, retailers act as a protective asset. All this helped Walmart with an annual revenue of $523 billion to increase its capitalization to $357 billion. The company's estimates are quite “earthly”: LTM is 25.4x. Forward P / E multiplier is 24x, that is, a one-time significant increase in company profits is assumed. Next year, earnings growth per share could reach 6.15%. Nevertheless, the food retail sector can hardly be called growing, so the stock growth phase is unlikely to be long. Dividend yield is 1.6% at current quotes, which seems to be a modest figure. Debt burden on Debt / EBITDA = 2.15x.
- Costco (COST). YTD + 6%. Another retailer with an increase in capitalization since the beginning of the year is closing another retailer with an annual revenue of $158 billion. Due to the rush demand and protective properties of the sector, the company's capitalization grew to $138 billion. By LTM P / E = 37.6x and forward P / E = 34x Costco priced more expensive than the previous competitor. The reason for the higher assessment may be a lower debt burden (Debt / EBITDA = 1.21x) and slightly higher expected profit growth rates next year (7.68%).
Top 10 stocks that millennials bought
During the tough March sales of 2020, millennials actively invested in the stock market. Thus, trading volumes through the Robinhood mobile application increased by 300% compared to a few months earlier. Millennials were actively buying software stocks. The circumstances that have arisen, social distance and the widespread transition to remote work at home, have benefited both companies in the sector and investors.
Millennial investors added securities to their portfolios that they thought were oversold. In addition to GE, cruise and automobile industries were included in these promotions, which were hit especially hard by showing levels of many years lows: Carnival and Ford.
Recreation Sector - Aurora Cannabis and Entertainment - Disney also attracted youth. At the same time, Walt Disney Co, although it closed cinemas and theme parks, but its streaming service Disney + showed impressive results.
The colossal problems faced by the aviation industry affected the cost of airline securities, so American Airlines and Boeing entered the top purchases. Without a doubt, COVID-19 ranked pharmaceutical companies and vaccine manufacturers such as Inovio Pharmaceuticals at the top of the list.
According to data provided by Robinhood, the top 10 shares that were purchased in the investment application in March 2020 included:
- Inovio (INO)
- Ford Motor (F)
- Aurora Cannabis (ACB)
- Disney (DIS)
- Microsoft (MSFT)
- American Airlines (AAL)
- Boeing (BA)
- Carnival corp. (CCL)
- GE (GE)
- Tesla (TSLA)
