Most people fear market crashes, but when they happen from all-time highs, they present opportunities. This is especially true for almost any mega-cap stock because their businesses usually survive market shocks the best. Disney (NYSE:DIS), Facebook (NASDAQ:FB) and Starbucks (NASDAQ:SBUX) are three examples of mega-cap companies whose stocks broke but the business models remain intact.
First we have to acknowledge that the time-frame on such a statement is very important. Investors looking to build or start long-term positions should have already nibbled on the lows. It is scary to catch falling knives, especially when almost all the experts in the media are obsessed with covering only the pitfalls.
The VIX is at record levels, so by definition risk is at its highest, this also makes it hard to see the light at the end. Without risk, there is no reward, so the upside of making the gutsy moves is tremendous here. Case in point was the astonishing more than 35% rally in Boeing (NYSE:BA) stock on Wednesday. Some stocks got too cheap and that is a fact that will outlast the coronavirus from China.
The problems with the economy here are self-imposed. By order from government leaderships, almost all businesses are closed for face-to-face interactions. So Starbucks’ business is dead in the water for now. Similarly, Disney is also suffering because its parks and all theaters are closed until further notice. Facebook is not a face-to-face platform, so its woes are less obvious but it too is suffering. Nevertheless, the quality of these three stocks compels us to try and buy-low-to-sell-high.
This week we can embrace such opportunities by buying the dips in excellent mega-cap stocks.
Mega-Cap Stocks to Buy: Disney (DIS)
Disney has an incredible track record that spans decades. Management has been almost flawless with its execution on plans. Long-term investors have reaped great rewards from holding this stock through every dip. Recently, this mouse has learned new tricks. In response to Netflix (NASDAQ:NFLX), Disney launched their own streaming service. Sign up metrics promise a very lucrative income stream. And memberships are building at an incredible rate.
The Covid-19 crisis is definitely causing financial troubles for Disney. Its parks are expensive to maintain, especially when they are not generating revenues. So for now, there will be pain, but the way Wall Street reacted was ridiculous. The price of DIS stock fell too swiftly and it overshot what’s reasonable. They priced in a scenario that is not realistic and that’s what makes this dip a great opportunity in this mega-cap stock.
My goal here is to find a reasonable entry point for the long term, not the absolute lowest tick. In this case, it may even yield shorter-term scalping opportunities. I don’t expect a V-shaped recovery in the economy, but stranger things have happened. The White House has the incentive to restart this economy and they will spare no expense. Washington has announced a $2 trillion relief program. The Senate already approved it and now it is on to the House. The bears will have a hard time shorting that. Moreover, the Federal Reserve has already committed trillions in monetary funds to assure liquidity. They say don’t fight the Fed, then they definitely won’t fight the White House on top of it.
Disney’s valuation also plays a roll because it has a price-to-earnings ratio of 15 and only 2.3 times its sales. While it DIS stock can get cheaper, it’s not bloated, so there’s not a lot of fat left to trim.
Starbucks’ current problems stemming from the virus are more obvious because it is a strictly face-to-face operation. The social distancing orders put a complete halt to its revenue streams. The good thing is that as soon as the medical community offers us therapeutic solutions and a vaccine prospect, people will go back to their normal routines. Getting coffee is a sacred one for millions and it will come back quickly.
Fundamentally, SBUX stock is reasonably priced, but value wont be the reason to catch this falling knife. While the P/E ratio of 20X is not obese, we can’t rely on the “e” denominator part, since the sales are down to virtually nothing. The ratio can balloon on the next set of reports, and it would then seem exorbitantly expensive. Even so, it would be a temporary phenomenon and investors can look past it. Wall Street likes to consider the relative value and Starbucks has plenty of it.
At the worst level of this crash, SBUX stock was down 50% from its highs. More importantly it fell to five year old lows and those from the 2018 correction. This is an unreasonable amount of value taken out too fast. A few weeks ago, this company was extremely strong and this temporary crisis is not likely to kill it forever. Starbucks will recover sooner rather than later. At $50 per share, SBUX stock was a bargain. The proof of this is that it rallied 30% off the bottom in mere hours. Nevertheless fear is still rampant, so caution is still warranted until that abates.
During the past two years, FB stock proved to be resilient in the face of tough tests. Investors ignored many flagrant privacy headlines and regulatory threats, so this tizzy here too shall pass. Management is now tried and tested and this Covid-19 freak hiccup won’t crush this mega-cap stock indefinitely. Technically, this dip brought Facebook close to the Christmas 2018 crash levels. This is also just above the $130 pivot zone that dates back four years. Facebook near $140 per share is a bargain.
This is an advertising behemoth and it is completely online. Yes, it will suffer from its indirect exposure through its company clients’ woes. But this social distancing has undoubtedly put its user metrics into overdrive. This week, management noted that they saw a drop in business, but that user engagement ballooned. People are segregated and they need Facebook services now more than ever to stay connected with their loved ones and co-workers.
The company is still firing on most of its cylinders; otherwise, they wouldn’t announce that they are giving every employee $1,000 to help them through the virus crisis. Management is calm in the face of adversity and investors should follow suit. In a few months, Facebook will go back to being a lucrative cash machine. I have no doubt that if the stock market is higher in the future, FB stock will be leading it. There will be technical resistance at $160 and $170 per share, but eventually the bulls will be able to clear them as the stock is now in stronger hands. Just like forests need fires to create fresh growth, stocks that rally too fast need corrections to transfer ownership into investors with stronger conviction.