Given the Coronavirus impact on the market, my monthly review will be abbreviated with a planned return to normalcy next month. That said, the portfolio was essentially flat with the S&P, both down – -9.18% for the index and -9.43% for me. The difference is an increased cash position which if I included would put me down 8.78%. Dividends rose 26.71% year on year but this is misleading as I timed the moves (actually buy/sell transactions) of my Canadian stocks to my IRA post ex-dividend date as best I could to duplicate several of the dividends.
Positions sold: TD Ameritrade (pending merger), Nutrien (a little leery of China’s ability to buy ag products per trade deal) and Invesco’s Timber ETF (is a slowdown looming?).
Positions Added: Vonage (a free one, so I’ll probably hold for a year) and Coca-Cola Japan (hoping the Olympics aren’t cancelled).
Now that we have a correction, what next? First and foremost, ensure your investing plan accommodates this type of black swan event. Next listen to multiple news sources to separate the hype from the reality. For instance, the World Health Organization upgraded the risk of spread on Friday. Also on Friday, a somewhat flippant Mick Mulvaney said, “what I might do today [to] calm the markets is tell people turn their televisions off for 24 hours”. The President held a Saturday press conference where he “called for calm … and tried to reassure the nation that the threat was under control”. Are you reassured?
I take my cues from warnings and conference calls. On Friday I was presented with my first dividend cut of 2020 – AMC Theatres. This is one I won’t sell on the cut for three reasons.
- I had suspected this when I bought my most recent tranche and I bought enough to pretty much offset the cut
- They are on the front lines of any potential virus impact
- They are doing it the ‘Warren Buffett’ way
The December drop (when I last bought), I did check the debt maturities first. In their call they stated, “when there is real uncertainty in the world, we’re going to be conservative and keeping cash in our pockets to make sure that — what I think might be somewhat irrational fears the market has had over the past few days don’t turn out to be rational fears.” In addition to the dividend cut, management is taking a pay cut replaced with out of the money options. Their priorities have become deleveraging first and rewarding owners via buybacks – which are paid out of retained earnings.
Frankly, I would not be surprised if others follow in AMC’s footsteps. Many foreign companies currently pay dividends at rates fixed to an earnings range. Should these times persist, perhaps earnings take a hit. How many US companies have retained earnings sufficient to weather more than a few quarters and still fund working capital, capital expenditures, acquisitions, research and development, marketing or debt reduction? If not, do they have the financial strength to sustain accumulated deficits? (Consider the energy sector in this regard).
Another interesting tidbit from the call was the comment, “we do not have business interruption insurance for the coronavirus”. It turns out that many insurance companies exclude viruses in a post-SARS world. Those that did not modify their policies or underwriting may have an impact in today’s world. This aspect was not analyzed for purposes of this post.
If the President is correct in asserting the threat (is) under control, we probably don’t need to be concerned with the financial stability of other public facing companies, such as restaurants, travel and leisure or retail. But that position, while projecting strength, belies the fact that supply chains are being stretched, production lines are at reduced capacity and the consumer’s capacity to spend is turning cautious.
While the WHO is urging calm, perhaps as a counter to Jim Cramer’s posturing, respected analysts, such as Mohamed El-Erian are weighing in on potential rate cuts being unable to stabilize the markets, arguing a medical solution is the only weapon. I suspect he’s correct and perhaps a solution is available sooner rather than later.
I don’t pretend to know which way the will markets react – only that increased volatility is probably here for a while. What I do is gather information and attempt to find flaws or weaknesses in possible outcomes to determine scenarios that might be profitable. Do your own due diligence, but my guess is medical solutions are priced into the stock price already.
Long: VG, AMC, CCOJY