Coronavirus Investing: Strategy Update (April 2020)

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What started out as a handful of cases in China has now developed into an incredible amount of volatility for stock market investors. Unless you were one of the lucky ones who sold out early (and there was a decent window to do so), most others have suffered on paper some pretty hefty losses. Times have changed, and the coronavirus investing strategies have changed, for me anyway.

As we may see on this site, coverage of profit warnings have ceased. Arguably, the pandemic has made analysis of these rather redundant now. In this past month, most companies have now warned on profits, but also with the caveat that they do not know what the final impact will be. The truth is at this stage, nobody really knows. With much of the bad news still ahead in countries such as the US and the UK it remains to be seen just how long the unprecedented control measures will last.

From the profit warning results (never an invested portfolio), these have been hit hard – down around 40% from its best position (excluding dividends). I would expect this to continue to underperform the market. With cashflow non-existent at the moment there will be more companies like Laura Ashley, who were most likely going under anyway before the coronavirus administered the final blow.

On the other hand, some companies that did issue profit warnings have gotten even cheaper, and there may be increased takeover activity once things settle down and some semblance of visibility has been established.

Much of my assessing is based on whether the current share price is at a value to my own calculated values. With current revenues not able to be predicted, this has clearly gone out of the window. Additionally many firms will have to use a significant portion of their cash reserves, which make up a large component of the share price.

There is an argument that the crisis should not make too much of a difference to long-term valuations. For those abiding to the edict that valuation is the sum of discounted cashflows, then even a zero in this year will not make too much of a difference. But I find it difficult to believe that for all companies, revenues will return to normal after this year has passed. One thing I am more certain of is that the aftermath of the virus will change the ways we live.

And with the maxim ‘never let a good crisis go to waste’, I believe that coronavirus will be the main feature for profit warnings for the next few years. Profit warnings unrelated to the virus will still be of interest and be covered, but I would imagine hardly any will fall into this category for the next few months.

Directors Purchases

One thing that was backed with real money was copying directors purchases. These have been heavily hit as well, and much like the broader market stand at around 30% losses. However, the real losses were more pronounced as at one point this portfolio was sitting at almost 20% profit.

The last month has seen some heavy director purchasing. This is not to be unexpected as share prices have collapsed, some to absolute low levels. This suffers from the same problem. After the purchase of Metro Bank (down 90%) I resolved not to copy the directors purchase unless I agreed that the market value was under my estimate. This also gave a predicted target price at which the trade would be closed. But with revenues and profits so uncertain, these estimates are not pretty much invalid.

However, my horizon is long term. Trades have been kept open and another estimate of value will be taken at a later time once there is more visibility. This may lead to some target prices being dropped and losses being taken. It is too early to say.

In the past month there have been several directors trades that would have qualified for this system. With the incredible amount of volatility around these were avoided at the time, but one of the assumptions of the system is that directors may be better placed to evaluate chances. Therefore, they will be added at some point.

Broader market strategy

It has become harder to make investments without having some opinion on what course the virus will take, and what shape the world will be in after it. In some instances, we are buying blind. Dart Group has been cited as a great purchase by some as its share price has collapsed by almost 75%. But who can tell how long a shutdown may last for? There also is an assumption that there will be pent-up demand for holidays, but with many people facing reduced incomes how true may this be?

There are many other shares like this. Either they will recover several times over, or go to zero. I would expect not many investors in the mid and small cap space to not avoid wipeouts.

Clearly, there will be people that have profited massively from the recent rally. Air Partner has rebounded spectacularly from its lows. It is important not to listen too much to market noise, to allow it to give a fear of missing out. That is doubly true in these times.

I won’t share too much of my predictions, although I do believe that the bottom is still not priced in. The macro picture is also too big to ignore, especially the incredible amounts of money being printed. Whilst I had a large percentage of cash before (savings in banks and premium bonds), I am much less of a believer in this going forward and I will be cashing in the premium bonds. You may be seeing more of these notices in future:

For now, my focus will be primarily on assets that are better placed to outrun the potential wave of inflation that may occur in the medium term, before considering those businesses that may survive.

So for now, there is a whole lot of watching, but not doing much. No shame in that. The most important thing is to stay safe.

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