Barron\'s 03.16.2020

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March 16, 2020 BARRON’S 11


STREETWISE


Doctors hope that keeping people


apart will “flatten the curve,” or


smooth out the rise of Covid-19 cases,


to prevent hospitals from being over-


run and caregivers from having to


make difficult decisions about who


may receive vital treatment. America


had only 1,600 or so confirmed cases


as of Thursday, but it is trailing other


developed countries on testing, so the


real number is assumed to be much


higher. Ohio, for example, had five con-


firmed cases on Thursday, when its top


health official projected that 1% of the


state was already infected.


The Dow Jones Industrial Average


lost 2,000 points on Monday, gained


1,100 on Tuesday, and then plunged by


3,800 over Wednesday and Thursday


before regaining 2,000 points on Fri-


day. Investors aren’t panic selling.


They’re reluctantly pricing in an eco-


nomic downturn.


Stocks have fallen from stretched


valuations at the start of the year to


more ordinary ones. Friday’s S&P 500


close of 2711 put the index at 16.7 times


earnings, assuming no growth this


year from last. But if we instead as-


sume a recession is coming, and that it


will bring an earnings decline typical of


downturns since World War II, the


index still trades at 19.2 times earnings.


By Jack Hough


Utah Jazz center Rudy


Gobert epitomized the


shift inmood. “I had no


idea I was even infected,”


he wrote in an apology.


“H


owever


bad you


thought


it was,


it’s


worse,”


started


an airline report from Cowen & Co. on


Thursday. The line could apply more


broadly to the week in global finance.


Many investors assumed that


Covid-19 would become a pandemic.


But how many predicted that Russia


and Saudi Arabia would start the week


with an oil-price war? Crude crashed


the most in a day since 1991, and the


effects could spill far beyond the en-


ergy sector. Shares ofBoot Barn


Holdings(ticker: BOOT), for example,


fell 29% on Monday after a downgrade


from J.P. Morgan, which pointed out


that more than a third of its stores are


in oil and gas markets.


Everyone expected canceled events


and more time spent at home. But it


was still startling when Italy went into


nationwide lockdown and the U.S. an-


nounced a ban on flights from Europe.


Utah Jazz center Rudy Gobert epito-


mized the shift: At a Monday news


conference, he mocked coronavirus


anxiety by touching every microphone.


By the end of Wednesday, he had tested


positive, and the National Basketball


Association had suspended all games.


“I had no idea I was even infected,”


wrote Gobert in an apology. “I hope my


story serves as a warning and causes


everyone to take this seriously.”


Next went hockey, baseball, soccer,


and golf. College sports, too. Broadway


shows went dark. Paramount pulled a


film.Walt Disney(DIS) closed both its


California and Florida parks for the


first time since the 9/11attacks. St. Pat-


rick’s Day parades are canceled. The


George Frey/ Getty ImagesBoston Marathon is postponed.


Shopping for Stocks?


Think Like a Lender


There are too many caveats to list


them all. Growth might snap back


faster than usual if the virus abates


quickly. Investors might give compa-


nies a pass for a quarter or two of lousy


earnings if healthier days are in sight.


Treasury yields are lower than Amer-


ica has ever seen, which could per-


suade investors to pay higher multiples


of earnings for shares. On the other


hand, although we think of the econ-


omy as a driver of stock prices, there is


a feedback loop through which strong


stock moves can influence growth. If


markets stay rocky, gloomy investors


could make for cautious spenders.


If you’re shopping for stocks now—


and there are plenty of reasons to do


so—think like a lender. Look beyond


income statements, and what they say


about cheapness, to balance sheets and


cash-flow statements, and what they


show about the ability to weather a


collapse in commerce. If things get


moderately worse, sturdy companies


are likely to outperform: A Goldman


Sachs basket of companies with strong


balance sheets has beaten the S&P 500


by four percentage points this year,


while a basket of weak companies has


underperformed by nine points. And if


things get much worse, strong compa-


nies will at least be in a position to buy


rivals or assets for a song.


This past week, I spoke with David


Harden, who manages theSGI US


Large Cap Equityfund (SILVX), with


a focus on downside protection. “I was


born for this market,” he says. The fund


ranks among the top 5% of its peers for


performance year to date as well as


over the past three and five years. He


likesZoetis(ZTS), a fast-growing


maker of medicine for pets and live-


stock, which he says people will con-


tinue spending on in a downturn. And


he recently added toAmazon.com


(AMZN), despite its consumer expo-


sure, because of its strong presence in


online infrastructure and ability to


prosper even if shoppers stay at home.


Investors can also pay attention to


companies with large cash balances,


likeMicrosoft(MSFT),Apple


(AAPL), andBerkshire Hathaway


(BRK.A). Berkshire, known for buying


big during downturns, announced near


the end of January that it was issuing a


billion euros’ worth of senior notes due


in 2025. The coupon: zero percent. As


signs of strength go, the ability to scoop


up free money is a convincing one.


I


n late 2008, while the stock mar-


ket was crashing, I was busy danc-


ing, and I don’t mean that as a met-


aphor. I was about to get married,


which I knew meant twirling with my


bride as our friends and family


watched. But I have the rhythm and


moves of an overturned turtle, so I


spent evenings at a dance school for the


desperate, shambling my way through


“Quando, Quando, Quando.” I can’t say


it lifted my spirits, but it turned my


market losses into the second-most-


distressing part of those days, and


helped distract me from selling.


No such luck this past week. Crowd


avoidance meant I couldn’t so much as


seek out a Zumba class or moonwalk


for tips in Times Square. Yet I managed


to avoid selling and even added money


to stocks. It wasn’t especially brave. I


ran an asset-allocation program, and it


said that I had a good mix for a 70-


year-old, but my driver’s license sug-


gests I’m 47. My tinkering during the


bull market, it seems, had turned me


into a financial Benjamin Button.


I’m now working my way back to-


ward age-appropriate investing, and


folks in a similar position should con-


sider joining me. Markets still appear


fraught with danger, but I plan to


work earnestly for 15 more years, then


lazily for perhaps another five—


enough time to ride out a few bear


markets, and perhaps even pick up a


new dance move or two.B


email: [email protected]


Look beyond income statements to balance


sheets and cash-flow statements. They show the


ability to weather a collapse in commerce.

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