The novel coronavirus presents a perplexing situation for investors. An economic full stop of this magnitude is simply unprecedented.
Economists and business analysts will make their best projections about where we’re going, but there’s too much volatility in the markets to have much confidence in how things will turn out. One thing that has given investors confidence during this crisis has been the response of the U.S. Treasury.
“Monetary policy has already taken aggressive actions to ensure liquidity in the financial markets,” Sarah Zubairy, Associate Economics Professor at Texas A&M University, told Investorplace. “But, fiscal policy can really play a major role in helping everyday workers and small and medium sized businesses to weather the recession.”
Zubairy says that’s one of the big reasons the $2 trillion stimulus package was passed relatively quickly back in March: “Policymakers also realize how dire the situation is and can further become.”
There’s disagreement about the benefits of the initial federal stimulus response. Ahmed Rahman, Associate Professor of Economics at Lehigh University says the stimulus plan “manages to spend both too much and fall far short,” saying “our epidemiological cure sadly calls for more macroeconomic pain.”
Rahman highlighted the ways our modern economy is particularly vulnerable to the current economic shutdown:
“During the Great Depression, services accounted for less than half of economic output; now it is more than three-fourths. The rub is that most services require something we have been asked to repudiate — human interaction. What will stimulus accomplish if would-be customers are not permitted to venture outside? We cannot get haircuts, and barbers cannot stockpile haircuts. The result is an aggregate spending multiplier so shrunken that dollars injected into the economy by the government will result in dollars squirreled away, not spent.”
With that in mind, what stocks should you be watching? These seven companies are in desperate need of a free-spending federal government:
- HCA Healthcare (NYSE:HCA)
- Walt Disney (NYSE:DIS)
- Capital One (NYSE:COF)
- Harley-Davidson (NYSE:HOG)
- AutoNation (NYSE:AN)
- The Gap (NYSE:GPS)
- New Residential (NYSE:NRZ)
With talk around Washington of an imminent fourth round of stimulus, investors may find opportunities in these stocks, but ought to remain cautious.
Stocks That Still Need Stimulus: HCA Healthcare (HCA)
So what kinds of companies could benefit from more stimulus? Zubairy added that health care companies could be clear targets for further government aid:
“Obviously, since this is foremost a health crisis, the government can direct resources towards the health sector to keep as many people healthy and safe as possible … Similarly, other targeted policies might be needed to help give out loans or bailouts to the hardest hit industries.”
HCA Healthcare is one of the nation’s largest hospital chains. You might think hospitals would be doing well now. They provide essential services during a pandemic, after all.
However, hospitals actually could be big losers from the coronavirus. That’s because hospitals actually make most of their money performing elective surgeries and other non-time sensitive treatments.
Due to the coronavirus, things such as hip replacement surgeries are currently delayed as adminstrators save space for potential Covid-19 patients. Unfortunately, hospitals don’t earn much money for emergency care, thus putting them in a bind the longer this crisis drags on.
As hospitals utilize more financial leverage, this could lead to major financial stress and layoffs of hospital employees. HCA’s debt was already junk-rated headed into this crisis, and shares dropped as much as 60% in the March crash. Further government assistance would really help boost HCA’s immunity to a prolonged pandemic.
Walt Disney (DIS)
It’s rough going for the House of Mouse lately. In fact, of the component stocks comprising the Dow Jones, Walt Disney has been among the worst performers.
Shares plunged from $150 to $80 during the crash, and have only just made it back to $100. That’s a far worse performance than most other blue chip stocks.
That performance makes sense though. The coronavirus has shut down most of Disney’s lines of business. ESPN is in trouble without live sports. Disney cruises won’t be sailing for awhile. The theme parks are closed for now. And nobody is going to see Disney or Pixar movies at the cinema either.
And in an inconvenient twist, the only part of Disney’s business that is booming — its streaming service — is the part of the business that loses large sums of money.
Long story short, Disney has furloughed tens of thousands of employees, and will suffer a major blow to earnings in 2020 and quite possibly 2021 as well. But more government stimulus could help in various ways.
Further paycheck protection plans could help with Disney’s crisis-impacted workforce. And more $1,200 payments to individual Americans would help boost discretionary spending on things such as Disney merchandise or streaming subscriptions.
Capital One (COF)
Consumers are one of the clearest victims of the coronavirus. With 20% of the nation likely to be unemployed in coming months, a lot of households are in tight circumstances.
Two-income households now have to scrape by with just one paycheck. Others have nothing at all coming in besides government assistance. This will hit consumer spending hard. That’s particularly bad news for credit card companies like Capital One.
For many people, things were going great right up until March 2020. People were willing to put vacations, household appliances and furniture, educational expenses and more on the credit card because income was coming in. Now that income is gone, but the expenses remain.
Credit cards are already a relatively risky business; Capital One ends up charging off around 4% of loans in good times, and that figure can go much higher in a recession. Now, with a sudden stop in people’s incomes, look for major stress here.
Of course, the $1,200 one-time payment was a huge help for folks; Capital One reported that March delinquency rates were essentially flat, and charge-offs only rose modestly. But what happens if there are no more $1,200 payments going forward?
And even with that, Capital One still had to take a more than $4 hit to earnings per share to build a buffer against future credit card loan losses if consumers stop paying their bills. Additionally, Capital One’s share price remains down more than 50% from recent highs. Further cash payments to consumers would do wonders for Capital One’s outlook.
With consumers under pressure, “fun” purchases are in particular danger. While people will keep buying essentials, they’re going to hold off on spending that isn’t necessary until they are confident about their economic situations again. If you’re looking for a company caught in the crossfire, think about Harley-Davidson.
Harley-Davidson shares have lost half their value in 2020, and that seems about right. Analysts expect their earnings to fall by half from last year as well as people choose not to buy motorcycles this year. On top of that, Moody’s cut Harley-Davidson’s credit rating another notch lower in April.
Moody’s made the obvious warnings about the company’s situation thanks to the coronavirus. But what was really attention-grabbing is how Harley-Davidson’s margins are continuing to fall in the U.S. as the core riding demographic is getting older.
Harley-Davidson has spent heavily on marketing to try to boost flagging sales, but it may miss a big demographic window if this recession drags on too long. Younger Millennial consumers, after all, tend to favor scooters and other lighter options.
Speaking of vehicles, the nation’s largest auto dealership, AutoNation, is another company that can benefit greatly from more government stimulus. Car sales are one of the best metrics of the health of a country’s consumers. Already, car sales had been in a slowly-declining trend for the past few years, but now Covid-19 has driven sales right off a cliff.
Unsurprisingly, AutoNation’s stock lost half its value in the recent market crash before making a modest recovery. Auto sales are a difficult business in a recession. Not only does demand drop, but you can also run into major financial issues.
An auto dealership maintains a large volume of inventory, with vehicles being worth tens of thousands of dollars each. Not being able to sell inventory, in turn, puts massive strain on a company’s financial position, as the balance sheet gets tied up in merchandise sitting on the lot.
AutoNation addressed its funding concerns, in part, by securing more than $77 million in Small Business Administration loans from the recent government stimulus package. This, however, drew criticism. The Washington Post exposed AutoNation taking small business loans — when they clearly aren’t a small business — and the company was publicly-shamed into returning them.
Still, AutoNation could use some sort of more politically-acceptable stimulus. The company runs lots of dealerships for high-end brands like Porsche, Lexus, and Jaguar. Needless to say, those will be hard-pressed for sales until the economic crisis starts to lift.
The Gap (GPS)
The virus has done a number on retailers. Their stores are closed, they’re in rent disputes with their landlords, and their employees face huge challenges as well. On top of that, there are less obvious problems, such as seasonal styles. A company like Gap now owns a mountain of spring and summer clothing that is likely to be out-of-date by the time the public is comfortable going to the mall again.
Last week, Gap announced that it will stop paying rent on its stores, saving it roughly $115 million per month. It’s also considering taking more drastic measures, such as issuing billions of dollars of new debt, firing employees, stopping orders for new merchandise, and more. The company also warned that it may be found to be in default thanks to the failure to pay rent, and that it is running low on cash.
Needless to say, any sort of government help would be a huge boost for the floundering apparel chain. A broader paycheck assistance program could provide for Gap’s employees. Some sort of national rent freeze or negotiation facility would help with landlords.
And it goes without saying, but giving more cash to ordinary Americans would help get revenues flowing quickly for Gap once its stores finally reopen.
New Residential (NRZ)
A few months ago, New Residential was a leading dividend income stock. The mortgage REIT paid a steady double-digit dividend yield, and was a favored holding of retirees and other folks seeking immediate high income. Unfortunately, the pandemic has crushed this once-popular cash cow.
Mortgage REITs such as New Residential rely on making profits from small swings in interest rates. They borrow money at a low rate, collect mortgage payments set at a higher interest rate, and pocket the difference. Now, however, this model is in peril.
For one, many homeowners have quit paying their mortgages for the time being — yet mortgage servicers are still on the hook for their obligations in the short-run, regardless. And two, the Fed’s drastic interest rate cuts shook up the market, causing wide swings in the value of various assets. Throw in leverage, and it turned into a disaster.
As a result of the crisis, New Residential slashed its annual dividend 90%, from $2 per share to just 20 cents now. The stock price evaporated as well, with shares plunging from $17 to $5. And if the Fed or the Treasury Department don’t come up with a solution for the ailing mortgage servicers, even the paltry dividend that remains could be wiped out.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.