Unprecedented sell-offs in global stock markets led the S & P500 to fall by more than 30%. The Dow Jones Index fell more than 35%. Given the increased volatility, at the moment of a mood change and a market rebound, stocks which showed a higher rate of decline are more likely to grow, that is, stocks with high beta.
Let us examine in more detail the dynamics of the sectors, which securities can be looked at speculatively on the horizon of several weeks. What may look better during the recession, what is interesting in the long run, and which stocks are better to bypass.
The COVID-19 pandemic took US stock investors by surprise. And it is not only a sharp and recoilless market decline. If you look at the industries, there was an almost synchronous drop in all industry indices, with the exception of energy, in the first two weeks of the collapse. There are no obvious favorites. Energy sector stocks (-60%) were hit not only by declining social and economic activity during the quarantine period, but also as a result of price wars in the oil market.
The situation began to change with the onset of the epidemic in the United States. The leaders were the shares of the Consumer Staples sector - essential commodities. This sector includes securities of network retailers: Target, Costco, Walmart. This also includes shares of Tyson Food, General Mills, etc. Support for these companies was provided by rush demand for products and goods, especially in connection with the introduction of the isolation regime and the “15 days to stop the spread program”.
Consumer Staples (CS)
Panic buying food supplies is not the only reason for supporting the CS sector. A recession is expected in the American economy. So, Bank of America said that the United States is already in recession.
According to the general concept of the business cycle, in such periods CS stocks may also be in high demand relative to other securities. From the beginning of the year, the sector decreased by 16% against 26% in the S&P500 index. With the start of the rebound, the most risky stocks with high beta can show a faster recovery. But CS stocks may show more stable momentum after a decrease in volatility. In addition to the above, there should be a place for shares of such giants as Coca-Cola, Pepsi or Kraft Heinz in the speculative portfolio of the investor. Piligrim’s Pride or Sanderson Farms stocks may also be of interest. Capitalization is low, stocks are volatile, but analysts expected a high growth rate for these companies before the collapse.
Health Care (HC)
In addition to companies involved in food production or marketing in one way or another, securities of the health sector, Health Care (HC), can act as protective assets during a recession. The health sector has lost 26% since the beginning of the year. This is significantly less than the S&P500, and significantly less than the energy sector.
In this sector there were additional drivers for support in the current crisis. The spread of the COVID-19 epidemic has increased the demand for medicines, and promising biotechnologists have presented their drugs for the treatment of a new disease and set about developing a vaccine. Shares of Gilead Science and Moderna were up 11% and 40%, respectively since the beginning of the year.
Despite the fact that investors in such securities or relevant industry ETFs felt relatively comfortable, HC stocks may not show significant acceleration at the time of returning their risk appetite. Once again, they can become interesting when volatility decreases or crisis phenomena intensify in the economy. The shares of companies that are currently working on a new vaccine may be exceptions.
In order to diversify the portfolio, we can cite several companies with a capitalization of more than $ 2 billion, which showed high expected rates of profit growth in relation to the P / E rating before the collapse, in addition to the bio techs mentioned above, that is, with a PEG coefficient below 1%. We are talking about stocks: Incyte, Alexion Ph, Ionis Ph, Exelixis.
Utilities
The shares of utility companies, that is, those that provide the connection, sell gas, electricity, water, are interesting during times of crisis and rising volatility. The sector is dividend and protective all according to the same standard principle of priority of costs of people and companies. At first - food, health, payment of utility bills, and only then - durable goods, all kinds of gadgets and technological goods, travel and other services of the entertainment segment.
In other words, Utilities shares did not show an outstripping decline in panic sales (-30%) and are unlikely to outperform the market in recovery. Moreover, thanks to measures of unprecedented monetary easing, raw material prices may rise, which does not benefit utility companies in general.
The list of potentially interesting stocks is huge and only a small part of them: Dominion Energy, Duke Energy, UGI Corp, NRG, NextEra Energy, Ameren Corporation. As an additional selection criterion, one can pay attention to the dividend yield, which in the capitalization sector above $ 2 billion is about 5–9% for a large number of companies.
Financials
Despite the fact that the shares of banks and financial companies showed a significant decrease (-40%), it is not always right to rush to buy them at the rebound. The fact is that, central banks around the world have sharply reduced rates as measures to combat crisis phenomena, in some cases, to zero or negative values. Along with this, the interest margin of commercial banks decreases as a rule, it becomes more difficult for them to earn on the main income-generating type of activity - lending.
Despite regulatory support measures, banks are likely to face deterioration in the quality of their loan portfolios, increased credit risk and reserves in the future. Shares in the banking sector may show more interesting dynamics already at the exit from the recession.
Stocks of payment systems Mastercard and Visa may be potentially interesting. Despite the decline in economic activity, the future is behind the cashless payment technologies, and the growth of online payments during the quarantine period may support the falling revenue of companies. Such securities at a good discount may interest long-term investors.
Information Technology (IT)
Shares in this sector have long been considered start-ups, or the so-called "growth stories." Such securities are typically traded with high P / E or EV / EBITDA multiples due to high future earnings expectations. In times of market turbulence and rising economic risks, such stocks decline faster than securities in the HC or Utilities sector. For this reason, it is not always recommended to pay attention to this sector during times of crisis in the economy.
However, at the current stage of economic development, taking into account globalization, it is no longer quite correct to consider representatives of the IT sector as startups that provide services that are not on the list of high needs. The expenses of individuals and companies on digital services, software products and related services occupy a significant part in the structure of expenses and household life. At the same time, the continued high growth potential of the IT sector business representatives will contribute to an energetic rebound in shares.
Among the most affected technology companies are UBER and LYFT. Taxi services during the quarantine period will show a failure, but not like public transport. But this is a temporary phenomenon. The restoration of social activity will return the digitalization of taxis and car sharing to the growth path.
To one degree or another, the IT sector includes the majority of companies popular among investors. Google, Microsoft, Amazon are among them. Specific factors are added to the high growth potential of these companies during the current crisis associated with the outbreak of COVID-19. The massive shift of employees to remote work has increased the demand for communication equipment and communication services. During this period, the cloud-based systems, which are involved in all three of the above companies, showed their best side and received an additional driver for growth. Online shopping (Amazon) can survive the renaissance and further strengthen its position in the retail market.
Quarantine measures limited the social activity of people, and the advantages of online advertising against traditional methods of promotion became even more obvious. Companies like Google, Facebook, Twitter, etc. benefit from this.
Software companies, which before the collapse showed high profit growth, may also be interesting for a rebound. These are shares of Medallia, Splunk, Twilio. These are newcomers to the market with low capitalization, but with high expected returns in the future.
Quarantine can contribute to the growth of the business of companies providing services for leisure at home: online cinemas, streaming services and game manufacturers. Here we can mention the shares of Netflix, Activision Blizzard, Electronic Arts, etc. Companies from this industry can take advantage of the situation and attract new customers through marketing campaigns.
Separately, it is worth noting the shares of technology companies that are somehow related to new technologies, such as 5G networks, artificial intelligence and the Internet of things. Despite the expectation of a recession, the vector of technology development is understandable, and companies will return to it after normalizing the situation. Investors can actively buy securities of companies such as Skyworks Solutions, Applied Materials, Nvidia. AT&T and Altice USA can be distinguished among telecom providers.
Separately, we note the company Tesla, personifying the future of the automotive industry. Despite the fact that stocks look relatively expensive to current sales volumes, investors see the company as a pioneer in the new market, when traditional automakers should turn into multi-disciplinary IT companies with emphasis on the environmental agenda and self-driving transport. A speculative investor should remember that a recession in the economy will inevitably hit demand for cars, including electric traction. This means that high volatility in Tesla stocks will continue in the future.
Energy
The energy sector has shown a significant decrease, but caution is required when buying oil and gas securities. Firstly, quarantine measures significantly limit energy demand. Even after defeating the spread of the coronavirus, the demand for raw materials will not recover in due volume due to the crisis in the economy, not immediately at least. Secondly, there is a fundamental problem with an overabundance in the oil market, and it is unlikely that it will be solved in favor of American independent shale producers.
The energy sector is heterogeneous. Among the private shale companies there are those who specialize in gas production, the consumption of which increases as coal and oil are displaced from the electricity and heat production industry for environmental reasons.
The fall in oil prices even provides some support to gas companies due to the potential disposal of significant volumes of associated gas from shale oil fields in the United States. Interesting names include Southwestern Energy and Cabot Oil and Gas.
The operators of transport capacities and pipelines are less dependent on oil and gas prices. A good example is Kinder Morgan, Williams Companies, Enbridge, and Equitrans. When considering stocks from the US energy sector, particular attention should be paid to the debt burden of companies. Despite the Fed’s rate cuts, the difficult situation in the oil and gas market could lead to a wave of bankruptcies among the most vulnerable players in the market.
