Investors selling stocks amid the plunging market have generally focused on those with demand issues driven by the spreading coronavirus. And so travel industry stocks have been hammered; casino valuations are collapsing.
The logic of these sell-offs admittedly makes some sense. Airlines, cruises and casinos will likely see significantly depressed sales for at least a few months. Given that most of those operators are heavily leveraged, even relatively short-term impacts can have a huge negative impact on earnings and long-term fair value.
But investors can’t ignore the supply side of the equation either. The coronavirus originated in China, a central hub of worldwide supply chains for nearly every major industry at this point. Plant and office closures in that country already have impacted major companies: Apple (NASDAQ:AAPL), for instance, lowered its revenue guidance for the fiscal second quarter in part due to the effects of those supply chain closures.
Other companies no doubt will make similar moves. And those companies, even with major indices falling hard again on Monday, may still be stocks to sell at this point in the cycle. These three names appear among the most vulnerable from the supply side — while struggling with demand-side worries as well.
Stocks Vulnerable to Supply Shock: Home Depot (HD)
To be sure, Home Depot (NYSE:HD) isn’t necessarily going to see rows of empty shelves across the country. But there’s likely going to be at least some disruption to its inventory.
On the company’s fourth quarter earnings call on Feb. 27, management did sound optimistic. Supply chain head Mark Holifield noted that “our [first quarter] merchandise is already here or on the way, and [for the second quarter] the picture still is developing there.” But chief executive officer Craig Menear admitted that “it’s a very fluid situation,” after which Holifield added that “it does change every day.”
Meanwhile, the Port of Los Angeles, which receives enormous amount of goods from Asia, has projected a 25% decrease in container volumes for February. (Final data isn’t available until next week.) Given Home Depot’s sourcing from both Asia and Mexico, some level of direct disruption is likely.
But indirect factors could pressure sales as well. Building materials are imported from around the world — including Europe. Those delays hold up projects — and spending by Home Depot’s key professional customers. Construction labor shortages already have hit remodeling spend. Tariffs haven’t helped. It takes only a modest bottleneck in certain products to add to those pressures.
At the same time, Home Depot obviously faces significant recessionary risk. Indeed, I’ve argued of late that HD stock is a cyclical stock being treated as a defensive name. Even with a recent pullback, that still appears to be the case. That suggests more downside ahead.
Automotive stocks like Volkswagen (OTCMKTS:VWAGY) face the same broad pressure on Home Depot. A potential recession would reduce demand. The coronavirus can cause supply chain bottlenecks.
For automakers, the pressure is potentially severe because Wuhan, China, where the new virus originated, is an automotive hub. That city, and most of Hubei province, remain under lockdown. And Volkswagen is the auto manufacturer most exposed to that region.
Wuhan is not only an epicenter for automobiles, but automotive parts as well. And some of those suppliers already are at risk for bankruptcy. As a result, even Tesla (NASDAQ:TSLA) has said it’s monitoring its supply chain for potential bottlenecks. Its rivals no doubt are doing the same.
Add in lower demand worldwide, and the risks are evident. VWAGY stock only is down about 20% so far this year. For it, and other auto stocks, the news well could get worse.
When it comes to chip developer Nvidia (NASDAQ:NVDA), investors are worried, but not too worried. Shares have pulled back almost 20% from February highs, admittedly. But last month saw something close to a “blow-out top,” and as I wrote at the end of last year valuation was starting to get a little stretched. Given the rout in the broad market, and in some tech high-flyers, performance certainly could be worse.
It certainly can get worse. Nvidia faces demand-side issues for its still-core gaming market. Consumers might be more willing to pay for gaming consoles or higher-end chips as they stay at home. But, as one analyst noted, macro weakness might also pressure that demand.
On the supply side, meanwhile, Nvidia faces risk. The company is a so-called ‘fabless’ chip maker that contracts actual chip manufacturing out to Taiwan Semiconductor (NYSE:TSM).
So far, there hasn’t been much disruption in terms of manufacturing, in part because chip fabs are remarkably clean places to begin with. But that could change. Export and import procedures will take more time. Extended fab shutdowns may still take place. And there are second-order impacts to consider.
After all, bottlenecks caused by other components can hit demand in both gaming and data center sales. Weakness in the latter segment pressured NVDA stock in the first half of last year. Lower automotive sales worldwide, too caused by supply chain disruptions, add another headwind.
For the most part, investors haven’t yet panicked when it comes to chip names like NVDA and AMD. It’s hard to tell at this point whether that’s a case of the market taking the longer-term view — or focusing more intently on more obvious short-term issues elsewhere.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.