From my friend Carl (For those that don’t know, he made his fortune in the market.)

In a bear market companies that are not profitable will ultimately trade at 1 times revenue.  Companies that are profitable but not growing or experience shrinking revenue will trade at 10 times earnings and as low as 5 times earnings if they have lots of long term debt.  Growth companies will trade at an average of 20 times earnings.  The smaller the company the higher the PE multiple can be if its revenue growing at a higher than average pace. 

We are beginning to see what I have been writing about as a reverse wealth effect.  What the stock market creates it takes away far more quickly.  When selling increases buyers vanish and values collapse.  This is what happened in the housing market beginning in early 2008.  Now it’s the stock market’s turn.  The stock market was bid up because of low interest rates.  It was set up for a decline because of record valuations, far above the historic averages of how individual stocks are valued.  This created I believe a sense of false security for those who are passive investors, that love buy and hold strategies.  Ultimately I believe valuations have to drop lower than expected in a bear market to offset the impact of valuations being too high.   This is creative destruction in its full glory.  Creative destruction takes no prisoners.

This will be very painful for many investors and money managers.  Many of the false premises of the past few years of high valuations are blowing up.  The first canary in the coal mine was the collapse of WeWork which attempted to go public last year.  WeWork could become We Are Closed as they fail to meet lease obligations.  The so called unicorn IPO’s of last year have failed.  They were dramatically overpriced I believe and now they will drop to prices that suggest failure.  Many are having a very difficult time achieving anything close to profitability.    The biggest over valuation in the recent past Tesla, stock price will eventually collapse as the emotionally driven buyers of the past throw in the towel with no buyers to be found as fear and common sense take over decision making.  If TSLA fails to meet sales objectives it should be priced more like GM.  TSLA is trading at 4 times revenue, GM trades at 1/3 of revenue.  By 2025 GM is planning to be almost 100% electric.  If you like TSLA, buy the car, not the stock. 


There will be very seductive rallies which will tempt people into buying believe its back to old times (the last 2 years).  If your not a trader or understand the risks of buying special situation stocks, wait until late in the year and than reevaluate.  There are many minor and major black swans that could still emerge by year end. 


This will provide some insight into the short term  future:

Spotlight on FedEx: FedEx (FDX) is one of the first heavyweight multinationals to report earnings after the coronavirus acceleration in the U.S. Analysts project the shipper will report revenue of $16.9B, consisting of $8.7B from the FedEx Express segment, $5.6B from the ground segment and $1.7B from the freight segment. EPS of $1.48 is expected and operating margin is anticipated to come in at 3.1%. What about guidance? How FedEx models and discusses the coronavirus impact on the U.S. economy could swing UPS (NYSE:UPS) up or down and sway the transportation sector as a whole.

Buyer’s anxiety:  People are addicted to owning stock and until the addiction ends, kind of like withdrawal from heroin, stocks will not stop going down.  People like Yardeni who says IF YOU HAVE CASH, buy quality.  One thing that destroys a market is when investors keep committing excess cash to stock.  In bear markets stocks trend lower with rallies that suck people in to committing more cash until they have no cash and lots of quality stocks still trending lower.  When people become fully invested is when fear dominates stock prices. 

 Barron’s mentions: There is a warning that the coronavirus outbreak poses an existential threat to airlines amid the widespread collapse in supply chains, trade, business and social activity. Spirit Airlines (NYSE:SAVE) is singled out as an airline that might not survive. The publication names seven stocks that could prosper amid the slump in oil prices. Concho Resources (NYSE:CXO), Cabot Oil & Gas (NYSE:COG), Phillips 66 (NYSE:PSX), Euronav (NYSE:EURN), International Seaways (NYSE:INSW), Scorpio Tankers (NYSE:STNG) and Valero Energy (NYSE:VLO) make the list. A Barron’s roundtable was convened to address what stocks look cheap amid the coronavirus-instigated rout. The list of long-term picks includes Applied Materials (NASDAQ:AMAT),Becton Dickinson (NYSE:BDX), Charles Schwab (NYSE:SCHW), Phillips 66 (PSX), Ingevity (NYSE:NGVT), UnitedHealth Group (NYSE:UNH), Merck (NYSE:MRK), Amgen (NASDAQ:AMGN), CME Group (NASDAQ:CME), Quaker Chemical (NYSE:KWR), West Pharmaceutical Services (NYSE:WST), Illumina (NASDAQ:ILMN), Herc Holdings (NYSE:HRI), Crane (NYSE:CR). In a big picture look, economist Ed Yardeni is trotted out to issue a prediction that the S&P 500 Index will swing to as low as 2,300 before recovering to 2,900 by the end of the year. “If you have cash, this is the time to buy quality names, some of the dividend-yielding stocks. They’re trashing utilities, consumer staples, quality companies that pay dividends and have always paid dividends in recessions,” reasons Yardeni.

I don’t understand rationales of selling being “overdone”.  Because a stock has declined and the selling maybe harsh does not mean the stock will go up.  It may only mean its going to trade sideways and possibly drop at a slower rate of decline.  If I wanted to be a buyer I would wait until November before committing money to stocks that are market sensitive.  Its always better making  ½ of a percent in a CD than losing 5% or more in a stock, no matter how much of a bargain it may appear to be.   Using restaurants as an example it is currently impossible to know the longer impact of the virus on growth prospects.  Ultimately its growth that makes stocks have sustainable rallies.  Any stock can be traded.  Buying DIN or EAT for a bounce is a trader’s skill set, not an investor. 

Restaurants: The restaurant sector has been battered over fears of just how steep the traffic drops will be in the U.S. for March and April. While some of the share price drops over the last month have been stunning (Dine Brands (NYSE:DIN) -60%, Brinker (NYSE:EAT) -60%, Darden (DRI) -50%, Denny’s (NASDAQ:DENN) -50%, Cheesecake Factory (NASDAQ:CAKE) -46%, Cracker Barrel (NASDAQ:CBRL) -42%)) some analysts see it as overdone. UBS’ Dennis Geiger says in his assessment of the beat-up sector that his firm prefers heavily franchised business models like McDonald’s (NYSE:MCD) and Domino’s Pizza (NYSE:DPZ) featuring lower operating leverage and carryout/delivery emphasis. The firm also sees Restaurant Brands (NYSE:QSR) and Yum Brands (YUM) as resilient business models due to their scale, diversification and quality brands to support defensive growth. Within casual dining, Darden Restaurants (DRI) and Texas Roadhouse (NASDAQ:TXRH) are called out as quality businesses, with strong balance sheets and other resilient attributes. Investors also could consider the impact of the coronavirus outbreak on food delivery services. Orders for Instacart (ICART), Postmates (POSTM) and DoorDash (DOORD) have surged in recent weeks as more people have stayed at home, while Amazon (NASDAQ:AMZN) notified customers that Prime Now deliveries would take longer than usual because of the rising demand. Does a wide outbreak raise concerns over ordering delivery or boost demand even further?