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All Contents © 2020The Kiplinger Washington Editors
By Charles Lewis Sizemore, CFA, Contributing Writer
| February 25, 2020
Health scares can really spook the market, as February's coronavirus-sparked market drubbing illustrates. But we still have portfolios to manage, even if it seems like the world is ending, and that includes hunting down the best stocks for whatever the market might throw at us.
It's never reassuring when you see news footage of quarantined tourists stuck on a cruise ship, or when the Homeland Security agent gives your passport an extra-hard look for recent visits to China. But now that the Centers for Disease Control and Prevention have admitted that a U.S. outbreak has gone from a question of "if" to one of "when," it has become much more real.
We're not health experts, so we won't pretend to know what's next. What we do know is: This isn't the first global flu scare, and it's not likely to be the last. We also know that while the data on coronavirus is still patchy, it doesn't appear to be exceptionally lethal. The death rate is about 2.3%, and the real rate could be lower. We have no way of counting early carriers of the virus who might have been misdiagnosed with flu or the common cold. For perspective, the "regular" flu kills only about 0.13% of those that catch it, but the SARS and MERS viruses had death rates of 9.6% and 34.4%, respectively.
But while the coronavirus is far less deadly, its effects on the economy will likely be much worse. When SARS hit the Chinese economy in 2003, China accounted for just 4.2% of the world economy, according to IHS Markit. Today, it makes up 16.3%. Thus, any pronounced Chinese slowdown will be felt around the world.
We'll get through this. But in the meantime, we have to deal with a stock market that could suffer considerably at the hands of this worldwide health scare.
Here are 11 of the best stocks to buy if the coronavirus scare continues to escalate. Some are buy-and-hold plays that looked appealing under normal circumstances but also possess strengths that make them an even better fit for this situation. A few others have fundamental long-term issues and are best viewed as shorter-term (read: a few months) swing trades. And while all of them are bound to take a few lumps on broad-market selloffs, they also have certain qualities that give them higher upside potential in this environment.
Data is as of Feb. 24. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $15.5 billion
Dividend yield: N/A
Few companies have done more to reduce paper waste and clutter, better organize the offices of the world, save untold millions of dollars in postage and parcel services, and even save entire forests of trees than DocuSign (DOCU, $86.37).
DocuSign is the most widely used e-signature system in the world. Whether you're buying a house, opening a brokerage account or signing an employment contract, DocuSign has made the process at least slightly less of a headache. Rather than sign documents by hand, scan them, then file them away, the company allows parties to sign documents via email. It's more secure and tamperproof than paper contracts and, according to DocuSign, is on average $36 cheaper and nine days faster per document.
And, at a time when people might be reluctant to shake hands to close a deal, DocuSign provides a way to close deals remotely without having to wait for FedEx (FDX) to deliver an envelope full of paper.
DocuSign is growing like a weed. Its revenues were up 40% last quarter, and its customer base grew by 24%. DOCU claims to have 562,000 customers. Given the service's convenience, it's difficult to understand why every company in America isn't already a customer. Though frankly, we'll likely get there soon enough.
Like many young tech companies, DocuSign doesn't currently turn a profit. So, it has to be considered a speculative stock. But it's also one of the market's best stocks over the past six months, nearly doubling in value since August. A realization that DocuSign's services looks increasingly appealing in this environment might help it press even higher.
Market value: $92.2 billion
Dividend yield: 3.7%
As a general rule, it's difficult to consistently make money in biotech. It has been likened to throwing a big plate of spaghetti on the wall and seeing what sticks. It's almost impossible to know ahead of time what drugs will eventually pan out in clinical trials and which ones the Food and Drug Administration (FDA) will approve.
That said, Gilead Sciences (GILD, $72.90) might be the single best pure play on fighting the virus right now. On Feb. 24, when stocks were tanking, GILD closed soundly higher after Bruce Aylward, a high-ranking official at the World Health Organization, said that Gilead's antiviral drug remdesivir "may have efficacy" against coronavirus. The drug has been rushed to China for clinical trials.
This is speculative, of course, and remdesivir may prove to be ineffective. It's also debatable just how much revenue the company can hope to generate from remdesivir even if it proves to be effective.
But even if there had never been a coronavirus outbreak, Gilead still would be a viable value play at current prices. For one, Gilead is so much more than remdesivir, boasting 25 marketed products in the U.S. Shares trade hands at just 11 times analysts' estimates for next year's earnings (much lower than the S&P 500's 19) and yield a very respectable 3.7% in dividends. Even after the recent bump, GILD trades at prices first seen in 2013. Gilead, along with many other large pharmaceutical and biotech companies, simply hasn't participated in the broader market run-up since 2016.
Political risk is alive and well, of course. We can assume that a "Medicare for All" solution championed by Sens. Bernie Sanders and Elizabeth Warren, two Democratic presidential primary candidates, would be bad for Gilead's bottom line. But at today's prices, it might be worth the risk.
Market value: $14.5 billion
Dividend yield: 2.9%
What could be better for flu-like symptoms than a hot bowl of chicken noodle soup?
Stop. I'm not going to seriously recommend you run out and buy Campbell Soup (CPB, $48.02) stock solely because millions of bedridden coronavirus patients will be needing soup. That would be ridiculous.
But there are a number of reasons to consider CPB one of the best stocks for this environment.
To start, worried shoppers are likely to increasingly stockpile canned goods such as Campbell's soup if the outbreak worsens. But furthermore, packaged food stocks like CPB are generally considered defensive by investors. It's worth noting that on Feb. 24, the day the Dow dropped by more than 1,000 points, Campbell Soup's stock actually finished the day positive. The stock also features a low beta – a gauge of volatility that measures a security's movement compared to the broader market. CPB's beta of 0.5 indicates the stock moves only about half as much as the broader market.
Campbell has struggled in recent years, as have most branded food companies. Consumers traded down to cheaper store brands following the 2008 meltdown, and many never switched back. Furthermore, the aggressive emergence of Amazon.com into the grocery market has only accelerated the move toward generic store brands. CPB's high debt is a considerable longer-term problem, as we noted in November.
You're not likely to get rich quick in Campbell Soup. But it seems like an ideal place to park a little cash until the coronavirus scare blows over.
Market value: $20.9 billion
Dividend yield: 2.5%
If there's anything that will kill a virus on contact, it's bleach.
Bleach isn't going to do much to protect you from an airborne flu-like bug if you happen to inhale the virus. But proper cleanliness is a critical part of stemming the virus's contagion, from wiping down affected areas to regular handwashing. And all of that bodes well for Clorox (CLX, $167.19), which is likely to see at least a modest bump in sales due to the virus scare.
But the story is bigger than that, and Clorox does more than market just bleach. It sells a variety of home care products under the Clorox, Formula 409, Liquid-Plumr, Pine-Sol, S.O.S, and Tilex brand names, among others. It also makes charcoal products, bags and wraps under the Glad brand, and even kitty litter and Brita water filters.
As was the case with Campbell Soup, Clorox is considered a defensive name that tends to do well when the economy hits a rough patch. And also like CPB, Clorox was actually positive on Feb. 24, while the Dow was dropping 1,000 points and the world appeared to be ending. And what makes Clorox a better long-term play is a much more tenable debt situation and status among the Dividend Arisocrats – 64 dividend stocks that have raised their payouts every year for at least a quarter-century.
If you're looking for a safe place to ride out the storm, it doesn't get much safer than Clorox.
Market value: $1.0 trillion
Amazon.com (AMZN, $2,009.29) is taking over the world. This is essentially a foregone conclusion at this point. The ease of ordering Amazon.com makes going to a mall seem almost old-timey and quaint. Whether it's a new computer, clothing or even your weekly groceries, chances are good you can buy it on Amazon, and at a reasonable price.
Beyond retail, Amazon is the dominant provider of cloud computing services to companies, government agencies and even regular Janes and Joes via its Amazon Web Services platform. The list of major companies using AWS are a virtual who's who: Apple (AAPL) reportedly spends more than $30 million per month on AWS, and Netflix (NFLX), Lyft (LYFT), McDonald's (MCD), Johnson & Johnson (JNJ) and even the U.S. Department of State are all noteworthy users.
If that wasn't enough, Amazon also goes head-to-head with Netflix and Disney (DIS) in video streaming. All this has already made AMZN one of the best stocks of the past few years.
The bull case, as it applies to COVID-19, is pretty straightforward: If more and more people opt to avoid crowded public spaces, companies like Amazon – that bring goods to your door and streaming video services to your computer, phone or TV – stand to benefit.
Amazon won't get through this completely unscathed. The company depends on goods coming from China, so disruptions to its supply chain due to employee absenteeism or factory closures could create problems, particularly during Amazon's annual Prime Day in July. It's something AMZN appears to be taking seriously and taking steps today to mitigate.
But it's important to note that any hiccups are likelier to be short-term in nature, whereas customers that embrace delivery from Amazon during the virus scare aren't likely to give up the convenience once it blows over.
Market value: $161.8 billion
Streaming video leader Netflix (NFLX, $368.70) has had its issues of late – so much so that we featured it as a stock to sell at the start of this year.
The issues we outlined haven't subsided. The arrival of Disney+ has created a worthy rival for Netflix. And the U.S. is increasingly looking like a mature market for streaming video. American subscriber growth has slowed down from millions of new viewers each quarter to hundreds of thousands.
Furthermore, the low cost of Disney+ and Amazon Prime Video make it harder for Netflix to simply raise prices at will. Given the content it offers, Netflix is arguably worth more than a cable package. But when your rivals are charging $6.99 per month or, in the case of Amazon, giving the video content away for free with a Prime membership, your pricing power is somewhat limited.
Last quarter, Netflix added 8.8 million new subscribers internationally, crushing analyst expectations by more than a million. However, NFLX has indicated it expects another 7 million new subscribers overall this quarter, which fell about 820,000 subscribers short of estimates.
The bull case? If we see more countries implementing lockdowns in response to the coronavirus, that number might spike even higher. There are few activities more pandemic-proof than binge-watching Netflix alone in your pajamas.
Netflix stock isn't cheap. The shares trade for 43 times earnings estimates and nearly 8 times trailing 12-month sales. But the continuation of a global pandemic might turn into an eventual short-term catalyst.
Market value: $553.1 billion
Investing in China right now might seem like a minefield. China is, after all, ground zero for the virus outbreak, and most of the infections continue to be recorded there.
But for Alibaba Group (BABA, $206.16) – considered one of the best tech stocks on the market before the coronavirus came into play – any weakness in the share price due to this scare should be viewed as an opportunity.
Alibaba is China's largest and most dominant e-commerce company, and it doesn't exactly have a U.S. equivalent. It has been called the "Amazon of China," but its core business model is actually a little closer to that of a middleman such as eBay (EBAY). It's also similar to PayPal (PYPL) or Square (SQ) in that it offers an online payment system. And the way it populates merchants' ads when users search on Alibaba's Tmall and Taobao sites is similar to Google. Oh yeah, and also like Amazon, Alibaba also offers cloud computing and video streaming services.
So it's better to think of Alibaba as a one-stop shop for Chinese e-commerce.
Alibaba – along with the rest of the Chinese economy – will have some issues to work through. Even though Alibaba is an e-commerce site, it still depends on humans to produce the goods it sells, deliver them and, of course, buy them. The company has already projected a coronavirus-related hit to earnings this quarter.
But this is precisely the opportunity for BABA to prove its mettle. The virus scare will only accelerate China's move into the digital economy, and the lessons learned here will be critical as the company matures. Alibaba will emerge from this a stronger, battle-tested company better equipped to compete outside of China.
Market value: $14.0 billion
Dividend yield: 0.9%
Food delivery options have gone upscale and gotten far more varied in recent years, but there's still no beating a hot pizza delivered straight to your door.
Domino's Pizza (DPZ, $363.01) stock has enjoyed a fantastic run, more than tripling in value since early 2016. In fact, it was one of the market's best stocks of the 2010s. But if people really hunker down and opt for delivery over restaurant dining out of virus fears, that epic stock move could still have some life left in it.
There's a lot to like in DPZ. It's a simple business – pizza – that is easy to understand. But Domino's isn't just a pizza company. It's a tech leader within the food services industry. Domino's did a fantastic job of investing in its mobile app a few years ago, and the results are obvious today. Orders placed via the app are often ready in a fraction of the time as orders placed over the phone.
Furthermore, Domino's gets a little more than half of its revenues from overseas, which is another plus. India, South Korea, and Japan are all major markets for Domino's, and all are in close proximity to China. Should the virus scare accelerate, pizza delivery might look particularly good in these markets.
Market value: $5.0 billion
Along the same lines, Grubhub (GRUB, $54.57) could be an interesting play.
Grubhub is the leading mobile food-ordering and delivery app with over 155,000 restaurant partnerships in the U.S. And U.K. Among some of its noteworthy restaurant partners are Burger King, Papa John's (PZZA), Shake Shack (SHAK) and Chick-fil-A, among many, many others.
The narrative here is simple enough: A good virus scare could boost consumer adoption of mobile food delivery apps like Grubhub. Once the scare passes, those consumers will remember how convenient delivery was and will stick with it.
We'll see. It's certainly likely that companies like Grubhub will get a boost. But you should also remember that this is a speculative stock in a brutally competitive market. Grubhub competes with entrenched DoorDash and Uber Technologies' (UBER) Uber Eats, as well as a host of other startups.
None of these companies is currently profitable. But they have managed to fend off Amazon Restaurants, which closed in June. But if you believe that food delivery is a durable growth industry, GRUB shares are worth a look. The stock trades for barely a third of its old 2018 highs but has been trending higher since October of last year.
Market value: $28.1 billion
Twitter (TWTR, $35.89) is no stranger to controversy. The company has been blamed for making social media toxic and for being a platform for hate speech and cyberbullying.
All of that might or might not be true. Not our call. But TWTR might also be one of the best stocks for the coronavirus outbreak.
To start, Twitter users generally have their heads buried in their smartphones or computers. It's hard to catch a potentially deadly virus if you don't have actual physical contact with another human being.
If people stay indoors and secluded more than usual because of the coronavirus, some amount of that time cooped up indoors will get spent on Twitter. But furthermore, Twitter is the most news-oriented of all major social media platforms. Major news stories will often break on Twitter before it breaks on CNN or Fox News. Not to mention, those media outlets announce breaking news on the platform, too.
It's not hard to see Twitter user engagement spiking during the coronavirus scare. And it's also worth mentioning that we're in the middle of a particularly brutal presidential election cycle that will likely increase user engagement.
Thus far, Twitter hasn't done a particularly good job of weathering this storm. The stock was down over 6% on Monday, massively outpacing the S&P 500's decline of 3.3%. But it held up better Tuesday, and TWTR had been trending higher since November; investors might rush back into the stock in a hurry if earnings come in strong in April.
Courtesy Zoom Video Communications
Market value: $29.0 billion
We'll wrap this up with video conferencing software provider Zoom Video Communications (ZM, $105.01).
If you're not familiar with the company, Zoom functions more or less like Skype, allowing meeting participants to see each other in video conference calls. But unlike Skype, which works best with groups of two or three people, Zoom works well with larger groups. If you're wanting to have a conference call with an entire company division, Zoom is probably your best off-the-shelf product.
If the coronavirus crisis continues to get worse, it's not hard to see many companies encouraging their employees to work from home. Apps like Zoom help to make that doable.
Like some of the other stocks on this list, ZM traded higher on Feb. 24, even while the world was ending. It's also worth noting that this young stock, which executed its IPO in April 2019, has been rocketing higher since December. Should the coronavirus panic continue to spread, don't be surprised to see it move higher still.
Charles Sizemore was long AMZN as of this writing.