Barron\'s - April 6 2020

M2 BARRON’S April 6, 2020

focused on companies that can withstand

the disruption, or whose terminal values are

little affected by a recession in 2020. Shares

of staples-oriented Dollar General (DG),

McCormick (MKC), and General Mills

(GIS) all rose at least 9.7%.

That could be a sign that the stock mar-

ket has already reached an “internal low,”

according to Keith Lerner, chief market

strategist at SunTrust Advisory Services.

“An internal low occurs when the inten-

sity of the selling pressure as well as fear

and indiscriminate selling reach a cre-

scendo,” Lerner wrote this past week.

“While the overall market index may con-

tinue to decline, the movement of stocks

within the index becomes less synchro-

nized. Once the internal low is passed,

there tends to be greater differentiation

among stocks within the market. Investors

start to separate the wheat from the chaff.”

While anyone predicting with certainty

whether the Dow or S&P 500 has already

bottomed out is likely overconfident, it’s a

fair bet that many individual stocks have

already achieved their lows. During the

financial-crisis bear market, the S&P 500

didn’t hit its 666-point trough until March

2009. But many individual stocks didn’t go

below theirNovember2008 lows after the

most indiscriminate phase of the selloff

eased. The same pattern occurred after the

dot-com bubble burst.

Investors should continue looking for

opportunities in individual stocks, with less

worry about the kind of no-safe-haven,

sea-of-red days when no company’s shares

are spared from steep losses. If a twice-as-

high-as-forecast 6.6 million jobless claim

number on Thursday didn’t spook inves-

tors, the data need to get a whole lot worse

than expected to see another swoon like

that. And it’s fair to say the market is al-

ready expecting several weeks, if not

months, of grim economic news.

And with first-quarter earnings season

right around the corner, it will be a chance

for the winners to differentiate themselves

from the losers in the coronavirus market’s

next phase. Investors will get a three-day

weekend to prepare for that, with stock and

bond markets closed for Good Friday.

We could all use the break.

Don’t Get Burned by Oil

Oil began the week by falling to its lowest

level in nearly 20 years. It ended it with

perhaps the least-predictable outcome of

all—with prices rising 32% as world leaders

discussed a global pact to bring energy

markets back into balance. But for inves-

tors wondering if it’s time to jump back in

to the beleaguered sector, the answer re-

mains a firm no.

The rescue plan now being hatched in-

volves an unprecedented degree of govern-

ment involvement in an area that has been

ruled by free—or at least semi-free—markets

for decades, with oil producers around the

world collectively cutting production by at

least 10 million barrels a day, out of the cur-

rent production rate of about 100 million

barrels. President Donald Trump wrote on

Twitter that he had spoken with Saudi

Crown Prince Mohammed bin Salman, and

Russian President Vladimir Putin has sig-

naled he’s on board, too. The Organization of

the Petroleum Exporting Countries is meet-

ing next week to hash out more details.

Some commentators see a deal as likely,

given that talks have already occurred. But

divvying up cuts could get tricky—OPEC

hasn’t even been able to get its own members

and allies to adhere fully to agreements in

the past year. “An agreement is on balance

likely given the progress that has already

been made, but the risk of collapse is high

given the challenges of curtailment in the

U.S. and of dividing up the effort among

OPEC+ members,” wrote Eurasia Group’s

Ayham Kamel.

The wild card is likely to be the U.S., the

world’s largest producer but also the most

unruly and fragmented. U.S. producers run

Vital Signs

Friday's Week's Week's

Close Change % Chg.

DJ Industrials 21052.53 -584.25 -2.70

DJ Transportation 7305.31 -393.87 -5.12

DJ Utilities 706.01 -52.92 -6.97

DJ 65 Stocks 6828.18 -337.44 -4.71

DJ US Market 607.60 -16.53 -2.65

NYSE Comp. 9880.63 -306.58 -3.01

NYSE Amer Comp. 1520.31 +33.08 +2.22

S&P 500 2488.65 -52.82 -2.08

S&P MidCap 1337.95 -84.97 -5.97

S&P SmallCap 622.35 -47.53 -7.10

Nasdaq 7373.08 -129.29 -1.72

Value Line (arith.) 4220.28 -282.58 -6.28

Russell 2000 1052.05 -79.94 -7.06

DJ US TSM Float 24860.74 -724.73 -2.83

LastWeek WeekEarlier

NYSEAdvances 680 2,646

Declines 2,371 427

Unchanged 23 12

New Highs 15 13

New Lows 284 894

Av Daily Vol (mil) 6,201.8 7,408.9

Dollar(Finex spot index) 100.68 98.37

T-Bond(CBT nearby futures) 182-180 179-020

CrudeOil(NYM light sweet crude) 28.34 21.51

Inflation KR-CRB(Futures Price Index) 127.96 123.88

Gold(CMX nearby futures) 1633.70 1623.90

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April 6, 2020 BARRON’S M3

the gamut from high-tech rigs operated by

big corporations to small “stripper wells”

that have been pumping in people’s back-

yards for decades. Making those wells stop

on a dime is no easy feat.

And U.S. officials involved in the negoti-

ations are reticent to make a deal that ex-

tends beyond the current crisis. Ryan Sit-

ton, a commissioner with the Texas

Railroad Commission, is part of the inter-

national talks to collectively reduce produc-

tion. The commission can force production

cuts in the state. Sitton said in an interview

with Barron’s that “a large portion of the

leadership of oil companies in Texas are in

favor of being a part of an international

deal.” But he sees government intervention

as a temporary tactic that will go away

when the Covid-19 crisis does.

“As soon as this is over, I think the U.S.

government gets out, we go back into market

competition both within the U.S. and exter-

nally, and people get back to work,” he said.

Either way, that is not good for U.S. oil

explorers. As a group, they were unable to

prove they can produce free cash flow even

at prices much higher than today. And even

if prices do get a larger bump from this deal,

it’s too early to tell how the industry will

change in the aftermath, or whether any of

them will be prepared for when the produc-

tion floodgates open again. In other words,

the price bump may have saved some pro-

ducers from the brink of distress—Whiting

Petroleum was the only producer to file for

bankruptcy last week—but the larger struc-

tural problems aren’t going anywhere.

For investors who want some exposure

to oil and gas, Chevron (CVX) is the most

attractive stock on a relative basis. Its bal-

ance sheet is strong enough to protect its

7% dividend yield and the company has

made commitments to slow drilling and

preserve cash. Should oil prices shudder

again—a likely outcome—Chevron can con-

tinue on its current path. If other producers

start looking to sell, the company should

have enough capital to take advantage and

possibly buy valuable acreage at a discount.

“We’re focused on fortress balance

sheets at companies that will survive,” says

Jeff Wyll, an energy analyst at Neuberger

Berman. “Chevron is one name—a survivor

with a fortress balance sheet.”

And that looks a lot better than counting

on feuding oil producers to stay the course.

—Avi Salzman

The Long and the Short

Here’s what else caught our attention:

Ma Bell. Forty years ago, AT&T (T)

would have been the stock to own during the

coronavirus crisis, it being the only option to

reach out and touch someone and all. Not

anymore. These days we’re using Zoom

Video Communications (ZM), Microsoft ’s

(MSFT) Skype, and Alphabet ’s (GOOGL)

Google Hangouts. AT&T is now just one of

three major carriers and is as much an en-

tertainment company as a telecom. The lat-

ter was one reason that J.P. Morgan analyst

Philip Cusick cut his rating on it to Neutral

from Overweight this past week. AT&T

stock is down 30% in 2020, but it may not

be done falling yet.

Buffett Crunch. Airline stocks, nearly

as much as cruise lines, have been among

the hardest hit by the coronavirus—and

they look as if they could get hit even

harder in the coming days. After Friday’s

close, Delta Air Lines (DAL) disclosed

that its second-quarter revenue would fall

90%. The news broke that Warren Buffett’s

Berkshire Hathaway (BRK.B) had

dumped huge portions of its stakes in Delta

and Southwest Airlines (LUV)—the two

airlines with the strongest balance sheets,

causing both stocks to tumble in after-

hours trading. If Buffett’s selling, who’s

buying?—Ben Levisohn

Industry Action

Performance of the Dow Jones U.S. Industrials, ranked by weekly percent change.*

Oil & Gas 5.12%

Health Care 1.82

Consumer Goods 0.23

–1.77 Technology

–1.99 Telecommunications

–3.34 Basic Materials

–3.39 Consumer Services

–4.63 Industrials

–6.89 Utilities

–7.21 Financials

* For breakdown see page M28. Source: S&P Dow Jones Indices

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