Another week has elapsed with the coronavirus headlines still front and center. Politically in the US little has changed with the President doing his utmost to slant the narrative, including leaving an infected cruise liner offshore stating, “I like the numbers being where they are,” … (appearing) to be explicitly acknowledging his political concerns about the outbreak: “I don’t need to have the numbers double because of one ship that wasn’t our fault.”
On the state of the markets, as anticipated there was volatility this past week – despite an emergency Fed rate cut – and the DOW eked out a slight gain. The one piece of good news at the end of the week was the announcement on test kits for the virus. Many details have yet to be released but will initially benefit two companies – Labcorp (LH) and Quest Diagnostics (DGX). I suspect it will be provided on a minimal cost-plus basis due to the optics and several insurers already stating existing policies will cover said tests.
It’s becoming increasingly clear that pundits (probably including yours truly) have disparate ideas as to what’s next. What is known is travel is being disrupted – Amtrak, airlines and ships. Conventions, including the iconic SXSW, have been cancelled or postponed with a direct economic impact already exceeding $1B – with more to come. Many companies are issuing earnings warnings, enacting travel restrictions and enabling work from home regimens. Schools in some areas – including the US – are temporarily closing. Each of these comes with a yet to be identified economic cost, both direct and indirect. As the US is primarily a service economy, much of this output will not be recovered in future quarter GDP numbers.
Playing on this theme, Jim Cramer began touting his “stay-at-home economy index”. While (hopefully) being a thought stimulus for his followers, the most blatant issue I have is how well these companies can profit from this paradigm shift. For example, will new subscribers flock to Netflix? Will companies continue their unfettered advertising on Facebook? How many buildings does Prologis have vacant to accommodate Amazon? Does Amazon have spare robots up their sleeve to ramp up? This ‘index’ might have legs if the virus is more than a one or two quarter blip.
Besides the test kits, my inclination is to look at the perceived necessities – the stuff flying off the shelves – even though demand may be based in fear rather than reality – and determine if the stock price reflects a value proposition. These would include (public companies only):
- N95 Face Masks (CDC approved)
- Honeywell (HON)
- 3M (MMM)
- Kimberly-Clark (KMB)
- Alpha Pro Tech (APT)
- Disinfectant Products (EPA approved)
- Ecolab Inc (ECL)
- Stepan Company (SCL)
- Lonza Group AG (LZAGY – caution – possible spinoff)
- Clorox (CLX)
- Reckitt Benckiser (RBGLY)
In store for the week ahead will probably be a battle for the headlines between Coronavirus and oil. No deal in Vienna is good news for US consumers other than the Texans dependent on the oil industry. Prudence dictates I review my oil patch banks’ relative exposure in a declining price environment.
Long: DGX, NVDA, AAPL, PLD, PEP, MKC, MMM, KMB, CLX