7 Services Stocks to Buy on Coronavirus Weakness


stocks to buy - 7 Services Stocks to Buy on Coronavirus Weakness

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The S&P 500 gained 4.6% on March 2 after news suggested that central banks around the globe would inject some stimulus into the economy via lower interest rates. 

The gain comes on the heels of the final week of February, which was an unmitigated disaster for stocks; the S&P 500 index lost more than $6 trillion in market capitalization on fears the coronavirus was turning into a global pandemic.   

On March 3, Federal Reserve chair Jerome Powell announced an emergency 50 basis point cut in interest rates. The head of the federal reserve believes the U.S. economy will “return to solid growth and a solid labor market” once the coronavirus outbreak ends and life gets back to normal. 

Thanks to the March 2 recovery, the U.S. markets over the last five trading days are only down 4.5% (including dividends) through March 2. However, several services stocks have still lost more than 15% of their value over the past week as investors bet Americans will stay away from public spaces. 

Here are seven stocks to buy that I see recovering all of these losses in the weeks and months ahead. 

Planet Fitness (PLNT)

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1-Week Return: -4.65% (through March 9)

Year to Date: -13.83% 

I  don’t think you could use enough Lysol wipes to get me to go near a sweaty gym at this point, which is why Planet Fitness (NYSE:PLNT) has lost more than 15% of its stock over the past week. 

It’s fair to say, however, that PLNT was due for a comedown after delivering a 3-year annualized total return of 47.9%. Trading at 8.3 times sales and 34.7 times its forward earnings, the stock is still not very cheap considering the bloodletting it has experienced over the past week. 

Expectations were very high for Planet Fitness stock, so when it reported fourth-quarter results Feb. 25 that included revenue of $191.5 million ($1.9 million higher than the consensus estimate) and earnings of 44 cents (three cents above expectations), the coronavirus was an easy way to take PLNT stock out to the woodshed. 

The reality is that business at its locations was still robust before the coronavirus reared its ugly head. System-wide same-store sales grew 8.6% in the final quarter of fiscal 2019. For the entire year, same-store sales rose an impressive 8.8%. In 2020, it expects same-store sales growth of approximately 8%. 

While fitness clubs such as Planet Fitness are likely to experience reduced visits as the coronavirus outbreak continues to spread, viruses such as COVID-19 will continue to occur in the years ahead. All the company can do is continue to educate its members, potential members, employees, and business partners while doing everything possible to keep its facilities as sterile as possible. 

If there’s a stock that was due for a correction, Planet Fitness was it. It might get even cheaper before it starts the next leg up. Under $60, it’s a steal. 

Churchill Downs (CHDN)

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1-Week Return: -6.2%

Year to Date: -14.1%

Churchill Downs (NASDAQ:CHDN) is a stock I’ve long promoted as a good buy. The last time I recommended it to InvestorPlace readers was in April 2018. 

At the time, I mentioned the diversity of its business model, which includes the iconic Kentucky Derby, the horse race of horse races held on the first Saturday each May. After all, who can resist the Run for the Roses?

I’ve never owned CHDN stock because I’m not keen on the number of horses that are put down each year during races. However, there’s no denying its success.

“The business is certainly a lot more diversified than most investors realize, but what I really like is the stock’s performance. It hasn’t had a negative annual return since 2009 and is up 9% year to date,” I wrote April 24, 2018.

CHDN finished up 2.5% in 2018, which isn’t half bad considering the S&P 500 lost 6.2% that year. In 2019, Churchill Downs gained 69.6%, its 10th consecutive year with positive returns. 

Down 14.1% year to date, I smell a comeback in the backstretch.

American Airlines (AAL)

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1-Week Return: -16.17%

Year to Date: -43.9%

Flying, much like taking the subway to work, is a giant moving petri dish of germs and unhealthiness. It’s not surprising that airline stocks as a group have lost 14.8% in the past week, with American Airlines (NASDAQ:AAL) leading the pack. 

InvestorPlace Market Strategist William Roth recently recommended investors sell three particular airline stocks now before it’s too late. One of those stocks is American Air.   

“American Airlines shares are continuing their hard and fast drop, down 11 of the past 12 trading sessions since peaking in the middle of February. Shares have lost nearly 40% of their value over that time, falling below their 2013 IPO lows,” Roth stated March 2. 

Usually, I’d recommend a safer play like Southwest Airlines (NYSE:LUV), which I suggested was cheaper than most investors thought back in April 2018. It has lost about 14% of its value since then, but it’s still held up much better than AAL. 

However, AAL has been beaten down so dramatically, the contrarian in me believes it’s got to bounce off the mat once the coronavirus threat is contained or eliminated. I see from the CNBC Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) portfolio tracker that Warren Buffett still owns 42.5 million shares of AAL, good for a 10% ownership stake in the company. 

Despite all the doom and gloom in the airline sector in the past year, American Airlines still managed to earn $4.90 a share, excluding net special items, in 2019, 8% higher than a year earlier. Cheaper than it has been since its 2013 merger with US Airways, American Airlines is the risk-takers dream stock. 

Six Flags (SIX)

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1-Week Return: -14.64%  

Year to Date: -52.2%

There is no question you aren’t a happy camper if you’ve owned Six Flags Entertainment (NYSE:SIX) the past five years. During this period, it’s delivered an annualized total return of -5.5%, considerably worse than the entire U.S. market, which gained 9.7%.

The operator of 25 amusement and water parks in North America, Six Flags, is about to start its hiring process for the busy summer season. The last thing it needs is to hire thousands of people only to have them stay at home because of the widespread outbreak. 

Considering how SIX stock has performed, it would have to consider the most speculative of the bunch. That’s especially true given the company recently reported a surprise fourth-quarter loss, sending its share price to a seven-year low. It also provided weak guidance and cut its quarterly dividend by 70%, to 25 cents from 83 cents.  

That’s all terrible news. 

However, for the entire fiscal 2019, it managed to generate positive adjusted free cash flow of $245.6 million. While that was down from $292.9 million in 2018, it expects 2020 adjusted EBITDA of at least $435 million.

Analysts have reason to be skeptical. They were expecting a profit of 14 cents. Six Flags delivered a 13-cent loss. 

To provide itself a little financial flexibility in 2020, the company will only pay out an estimated $85 million in dividends in 2020, down from $279 million in 2019. 

If you’re a speculative investor, getting paid 5.12% to wait for Six Flags to recover is an excellent risk/reward proposition. If this is money from your retirement account, I’d look elsewhere for income. 

Royal Caribbean (RCL)

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1-Week Return: -18% 

Year to Date: -50.7% 

Like a lot of services stocks, Royal Caribbean (NYSE:RCL) was getting pummeled before this past week’s major slide. It’s been so bad that you have to go back to its 10-year numbers to find a decent performance. 

Back in March 2015, I recommended Royal Caribbean, along with Tractor Supply (NYSE:TSCO) and Under Armour (NYSE:UA, NYSE:UAA), three of 16 stocks that were added to the S&P 500 in 2014.

My rationale for buying RCL was all about CEO Richard Fain, who still runs the massive cruise operation. 

“When Fain took the helm of the second-largest cruise operator in the world in 1988, RCL had revenue of $520 million. Since then, its revenues have grown almost 9% per year over a 27-year period to $8.1 billion. It might not sound like much, but over such a long period of time, it’s really quite significant,” I wrote on March 18, 2015. 

Fast forward to 2019. Royal Caribbean finished the fiscal year with adjusted earnings of $9.54 a share and revenue of $11 billion. Year over year, its operating income increased 9.9% to $2.08 billion. Those are all very respectable numbers. In 2020, it expects adjusted earnings per share of $10.40 to $10.70 a share.   

That doesn’t take into consideration the effect of the coronavirus. On Feb. 13, Fain addressed the issue directly, suggesting that the outbreak could materially impact the company’s business, but it’s too early to tell. 

Cruises are getting canceled. That’s undeniable. However, RCL stock is cheaper than it has been on a valuation basis since 9/11. Fain handled that period with composure. He’ll do the same regardless of what transpires in the next few months.

At less than five times cash flow, it’s one of the best values available. 

Urban Outfitters (URBN)

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1-Week Return: -18.9% 

Year to Date: -31.3%

Since Urban Outfitters (NASDAQ:URBN) recovered from the financial crisis in 2008, its stock’s only traded under $20 on one occasion for approximately three months in the summer of 2017. It did dip under $20 for a brief week in August 2019. Since then, it’s traded between $20 and $30. 

The company’s three main banners: Urban Outfitters, Anthropologie, and Free People, have struggled to find their footing in recent years. This has kept a lid on any real stock appreciation at a time when the markets have generally done well. Over the past three years, for example, URBN stock has generated an annualized total return of -9.4%, significantly worse than the 10.8% total return for the markets as a whole. 

On March 3, after the markets closed, the company reported its Q4 2020 results. Its same-store sales grew 4% in the quarter due to strong online sales offset by negative brick-and-mortar sales. Overall, the company’s $1.7 billion in Q4 sales was a record. Furthermore, its spring assortment is selling well, suggesting that the first quarter of 2021 should also be good. 

For the year, it had $3.98 billion in sales with Anthropologie and Free People showing small gains offset by a slight drop at its legacy Urban Outfitters concept. 

On the bottom line, unfortunately, the company continues to struggle to produce higher margins. In the fourth quarter, its adjusted operating income was $67.1 million, or a margin of 5.7%. A year earlier, its operating profit was $117.8 million, or a 10.4% margin. For the entire year, its operating margin was 5.8%, 390 basis points less than in 2019. 

If you consider that TJX (NYSE:TJX), which many think is one of the best retailers going, has a price-to-book multiple of 12.6, Urban Outfitter’s P/B multiple of 1.6 seems like a downright steal. 

I’m being slightly facetious. TJX’s business is in a much better place than Urban Outfitters. However, down almost 27% over the past 52 weeks, and closing in on $20, aggressive investors interested in retail might want to give it some consideration.       

Park Hotels & Resorts (PK)

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1-Week Return: -10.8%  

Year to Date: -37%

Park Hotels & Resorts (NYSE:PK) was spun-off from Hilton Hotels (NYSE:HLT) on Jan. 3, 2017. Hilton shareholders received one share of Park Hotels for every five shares of the parent and one share of Hilton Grand Vacations (NYSE:HGV) for every 10 shares of Hilton. 

For example, if you owned 10 shares of Hilton immediately before the split into three companies, but after the 3-for-1 reverse stock split, today your $540 would be worth $999, a compound annual growth rate of 22.8%. 

That’s good news. The bad news is that Park stock has severely underperformed, losing 14% of its value in the three years since it started trading as an independent public company.

The hotel owner’s business, however, looks healthier than ever. 

On Feb. 26, it announced fiscal 2019 results that included a comparable revenue per available room (RevPAR) of $183.32, 1.9% higher than in 2018, with an average daily rate (ADR) of $221.91, 1.2% higher than a year earlier. On the bottom line, it had adjusted funds from operations (FFO) of $613 million, 1.7% higher than a year earlier. 

While it’s true those numbers will take a hit in the short term, CEO Thomas Baltimore is confident that it continues to build on its strengths while deleveraging the balance sheet. To that end, it sold three hotels during the fourth quarter for gross proceeds of $260 million. In all four quarters of fiscal 2019, it sold eight non-core hotels for total proceeds of $497 million. 

Thanks to its acquisition of Chesapeake Lodging, the lodging REIT owns 60 premium-branded hotels with over 33,000 rooms available. Yielding 9.8% at the moment and likely to move higher as the overall effects of the coronavirus become known, Park Hotel’s position within the U.S. lodging industry suggests it’s a good buy for an income-generating portfolio.       

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

Article printed from InvestorPlace Media, https://investorplace.com/2020/03/7-services-stocks-to-buy-on-coronavirus-weakness/.

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