What on Earth are you supposed to do now?
Do you sell up positions you’re still in? Do you sit and wait it out? Do you dump as much into the market as you can? Do you buy gold? Silver? Bitcoin? Stocks? Property?
Where do you start? When does this end?
Well the question should probably be, how did we even get to this point?
Albeit I can answer that for you.
Horrifically poor fiscal and monetary policy from central banks and government.
The response, reaction, and extreme measures have crippled economies. This isn’t a result of the coronavirus, this is a result of incompetent governance. It’s a result of a financial system that’s already fractured and fragile.
However, there’s only so much we can do or should bemoan regarding the situation these bungling political elites have thrown us into.
You really just have to play the ball that’s bowled to you, not worry about the next one until it’s coming at you.
And right now the ball we face is a capitulating market, crashing currency, and a slide into recession. Also, just around the corner is rising unemployment and inflation…just a heads up.
Well, what to do, what to do?
The way we see it is that a bottom has not yet fully developed in the market. Markets aren’t fans of recessions, rising unemployment, and rampant inflation.
And so far while we expect those things, they’re not really just yet at the forefront of the market. When it is, when that comes next, we expect further moves lower.
This means there will be a bottom to this market. A point where there’s such a disjoint between what’s happening and values that the recovery boom will kick in.
That’s the time when we’re going to be ready to strike.
How do we find them?
So, if we’re playing the market as we see it, then what are the kinds of stocks we’re looking at?
If we’re hoarding stocks, preparing to launch them to our subscribers, what are the key aspects that make them worthy or not?
Here’s what I look for…
First off, I want to see if their stock price has been decimated because of the current crisis, or it’s a long-term story before this all kicked off.
That’s pretty easy to figure out. You can easily look at the short- and long-term charts for this.
Now, if there’s been systemic falls in the stock price extending out to two, three, four years and longer, that’s a red flag. That’s not to say there won’t be a short-term bounce if markets turn. But if the trend has been down for a long time, well there are likely better candidates out there.
Now, if the stock was heading towards peaks in the lead up to all this, then we take a closer look at things.
I’ll then take a look at where the price is now comparative to the last massive stock market crisis we had in 2008 and 2009. Is the price so low that it’s like it’s March 2009?
The answer to that isn’t hugely important. But the closer the stock is to those GFC crash lows, the more attractive it becomes.
However if it’s really been hammered, ironing out around a decade of gains, we still need to ask why. And right now it’s typically a particular category of stocks that have been overly smashed.
For the ones that are down, but only at two-, three-, or four-year lows, we still look deeper. Right now we’re seeing a number of stocks that are around 50% away (and more) from their pre-coronavirus crisis highs.
That’s opportunity. However, it’s still important to look at the business and their industry, and their position in it.
The money matters
The company and their industry is next. For example those stocks that have been overly hammered tend to fall into what I’m calling the ‘lockdown list’.
Those are the stocks that fit into categories like restaurants and hospitality, sports betting, events management, and entertainment and leisure (where you physically go to enjoy, like a cinema).
These have been hit hard because they’re sensitive to the lockdown shock. If you can’t go to the cinema, the cinema doesn’t make money. If there’s no sport to bet on, sports betting companies don’t make any money. If you can’t have a gathering of more than a handful of people, weddings, funerals, concerts, festivals…they don’t happen.
Again, these are all areas of huge opportunity when we’re out of lockdown. But the tricky aspect is when will that happen?
Will it be when new cases of infection start falling? Will it be three months? Will it be a year-long mixture of lockdown, isolation, and bans on large public gatherings?
We don’t know the answer to that, and until we do, there are no guarantee companies in these industries will be able to survive. There are so many contingencies on their survival that it’s impossible to know until you know.
That’s why we also take a deeper dive into their financial situation. What kind of debts are they carrying? Are there loads of current liabilities that need paying up? Or are they more non-current liabilities?
Also what are the levels of debts versus cash on hand? Are they already moving through cost-cutting measures to ensure they can string out their runway? Or are they yet to carry out any decisive action?
These are all important factors that help us filter the list and make sure that these companies can weather the storm.
That gives us the advantage that we can move into the stock once the macroeconomic factors have seen the market bottom. And when we do, before the tide turns, we can do so with a level of confidence the stock will continue to be a going concern.
Finally in this kind of market, with this kind of opportunity, we also want to try to find (where we can) stocks that pay dividends.
Companies that have a good track record of being profitable and paying a dividend under ‘normal’ market conditions are our market jackpot.
When the world returns to normal, and it will, these companies will still make money like they used to. And if you get in with the right kind of entry point, your potential yield becomes huge. Not only that, the double whammy is you get a great yield on your entry as well as the potential capital growth to come as well.
Now, even if the capital return takes a while, you’re still potentially getting a yield that counterbalances that capital volatility. In a sense at the right entry point, with the right yield in normal conditions, you can almost be ‘capital agnostic’.
That means the capital fluctuations are almost irrelevant if you can receive a strong dividend yield — but you really need a long-term runway for that to take full effect.
Anyway, that’s a glimpse at some of the factors I consider when trying to pick stocks in a crashing crisis market.
It’s great because of the vast number of brilliant companies that are now available at a huge discount. This market is fast shaping up as a long-term investor’s dream. You just need the right stocks with the right factors at the right time.
Not so easy, but that’s exactly what we’re here for.
Editor, Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.