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.