The rapidly spreading coronavirus outbreak — formally dubbed COVID-19 — is getting worse around the globe by the day, and it’s sending financial markets into a tailspin. As of this writing, the S&P 500 trades about 30% off its February 2020 highs.
During times of immense volatility like this, investors should be looking for stability, and at the current moment, there is some stability to be found in high quality, large-cap stocks.
What exactly does that mean? The base case for COVID-19 is that the virus is going to cause a sharp but short downturn in the economy. Many small businesses don’t have the resources on hand to survive this downturn. Even further, many large businesses have such big exposure to consumer discretionary spend and/or such huge debt burdens that the sharp slowdown will hurt them in a big way, too.
But, then there’s the group of big businesses that will be able to weather the coronavirus storm quite well.
These are the businesses that have cash-heavy balance sheets, so that any and all losses over the next few months can be easily absorbed. They have healthy operating fundamentals, in that their businesses won’t be derailed because of the coronavirus. They have big profit margins and huge cash flows, the likes of which will act as a buffer to profitability headwinds during this time.
In other words, if you’re looking for stocks to buy on this dip, perhaps start with high quality stocks that have a ton of cash, very little debt, minimal coronavirus exposure and strong profit margins and cash flows.
With that in mind, some high quality large cap stocks to buy at a discount include:
- Facebook (NASDAQ:FB)
- Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B)
- Microsoft (NASDAQ:MSFT)
- Alphabet (NASDAQ:GOOG)
Let’s take a deeper look into what makes each of these large-cap stocks worth buying now.
Large-Cap Stocks to Buy at a Discount: Facebook (FB)
When it comes to quality, social media giant Facebook checks off all the boxes.
Strong balance sheet? Check. At the end of 2019, Facebook reported nearly $55 billion in cash and short-term investments. The debt load totaled about $10 billion. Facebook’s net cash positioning, then, is about $45 billion, good enough to cover 12% of the company’s market cap.
Strong operating fundamentals? Check. Facebook owns four social media platforms, each of which has over a billion users. Consumers, cooped up in their homes for the next few weeks, are going to spend more time than ever on those platforms. Sure, ad dollars may take a hit as companies reel back ad spend as their budgets tighten. Still, ad spend will come roaring back once the virus passes, and Facebook’s numbers will look great.
Strong profitability? Check. Facebook’s digital ad business operates at 80%-plus gross margins. Operating margins are north of 40%. Operating cash flow was about $36 billion last year, or equivalent to 9% of the current market cap.
All in all, Facebook is the textbook definition of high quality. And yet, FB stock trades at just 15-times forward earnings. That’s too cheap for this big growth, high quality stock. Eventually, once COVID-19 headwinds pass, this stock will bounce back in a big way.
Berkshire Hathaway (BRK.B)
The most attractive thing about Warren Buffet’s Berkshire Hathaway during the coronavirus outbreak is the company’s balance sheet.
Berkshire Hathaway is a cash flow machine. Every year, this company produces more than $35 billion in operating cash flow. For years, analysts and investors alike have been begging Buffet to weaponize those cash flows with buybacks or acquisitions.
Buffet didn’t. Berkshire’s balance sheet grew. And grew. And grew. Until now, at a time when cash is a very valuable resource to buffer against near-term pain, Berkshire Hathaway has a whopping $128 billion in cash sitting on the sidelines.
That $128 billion is big for Berkshire during the coronavirus outbreak for two big reasons. One, it will help the company absorb any near-term impact from the virus. Two, Berkshire now has an opportunity to do what Buffet is best at — deploy capital to distressed situations at highly favorable terms.
Buffet did this in 2008 with banks. It worked out very nicely. He will likely do the same in 2020 with travel industries. It should work out just as well.
As such, BRKA stock — supported by one of the biggest balance sheets around — is one of the higher quality, large-cap stocks to buy during the market selloff.
With one of the biggest and strongest balance sheets around and a healthy core operating business, technology giant Microsoft is another high quality stock to buy on the dip.
Last quarter, Microsoft reported $134 billion in cash and equivalents on the balance sheet. Total debt amounted to less than $70 billion, implying a net cash position for Microsoft of more than $64 billion. That’s huge — big enough that Microsoft should be able to withstand any and all near-term pain inflicted from the coronavirus pandemic.
At the same time, the company’s core business — selling cloud-based services and solutions to both consumers and enterprises — is a strong one. Demand for these services may taper off marginally over the next few weeks, but not by much, since many of Microsoft’s core services are mission-critical for companies.
Regardless of the near-term impact, in the long run, demand for these services will continue to grow at a robust rate as all workflows, processes and data migrate to the cloud over the next three to five years.
Big picture — Microsoft is a winning company with one of the strongest balance sheets in tech. Yet, MSFT stock trades at just 25-times forward earnings. That’s pretty cheap for a company of this ilk. As such, gradually rolling into this dip should pay off in the long run.
Much like Facebook, digital ad giant Alphabet is a cash-heavy, debt-light company with strong fundamentals and big margins and cash flows.
At the end of 2019, Alphabet had nearly $120 billion in cash and short-term investments on its balance sheet. Debt totaled about $15 billion, giving the company a net cash position of about $105 billion. That’s the biggest net cash position in all of tech, so Alphabet has more than enough resources to absorb any and all near-term coronavirus related headwinds.
Yes, the company’s digital advertising business will be down over the next few weeks, as companies peel back ad spend. But, consumers will be interacting with YouTube and Google’s other properties more than ever before. Thus, once the virus passes through, ad spend will ramp back up and Alphabet’s numbers will be as good as they’ve always been.
Onto profitability, Alphabet operates at 55%-plus gross margins with 20%-plus operating margins. The company also produced more than $50 billion in operating cash flow last year. Clearly, margins and cash flows are big enough here that Alphabet’s numbers can take a big hit and still remain in the black.
Yet, despite all these favorable attributes, GOOG stock now trades at just 20-times forward earnings — matching its cheapest valuation in the past five years.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB.