The novel coronavirus is already proving to be the biggest economic shock to the world economy since the Great Financial Crisis of 2008. Perhaps it will be even worse than that by the time all is said and done, with a number of stocks to sell out there. In any case, the S&P 500 fell 20% in the first quarter. And the U.S. wasn’t alone; global markets got hammered in unison. It wasn’t just equities either. Bonds, foreign exchange, and even gold and crypto-currencies experienced historic levels of volatility. April got off to no better of a start, with the S&P sliding another 4.4% on Wednesday.
“All markets other than life-sustaining products and services will be decimated the longer COVID-19 is controlling buying decisions,” said Denny Hummer, an incubator manager/consultant with StartUp Lewisburg, in an email to InvestorPlace. “Think back to Psych 101 and Maslow’s Hierarchy of Needs. We’ve all basically been forced back to ensuring our safety needs are met before others — a defining moment in human evolution. I’d love to see the sales volume of garden seeds compared to recent years.
StartUp Lewisburg is the startup incubator of Bucknell University’s Small Business Development Center.
So, with markets in turmoil, what are investors to do?
A key thing at this point is to determine which of your holdings can survive a prolonged economic shutdown, and which cannot. Balance sheets and liquidity are the key to picking good turnaround candidates out of the market’s discount bin now.
A company that can make it into 2021 has a reasonable shot at recovery even if the stay-at-home orders drag on into the summer. These seven companies, on the other hand, desperately need a quick return to more normal economic conditions. Otherwise, investors could be left facing huge losses, or, in some of these stocks, even a Chapter 11 filing.
As such, these are stocks to sell now. Be very cautious if you own these seven stocks and the quarantines continue for any meaningful length of time.
Stocks to Sell: AMC Entertainment (AMC)
When will the stay-at-home orders start to lift? It’s a life or death question for cinema chain AMC Entertainment (NYSE:AMC). Because, as long as malls and shopping centers are shut down, AMC has essentially no revenues coming in. And it couldn’t come at a worse time for the firm.
Over the past 12 months, AMC stock plummeted from $17 to $6. And that was before corona virus hit. Then AMC dove another 66% to a low of $2, before bouncing slightly in recent days. As the company’s steady stock price erosion over the past year showed, AMC was in trouble even before the quarantine.
As of last quarter, AMC had only $265 million in cash on hand, and limited other readily-available assets. Against it, AMC faced $1.9 billion in current liabilities and a staggering $4.8 billion in debt. With no cash coming in for the foreseeable future, AMC’s reserves may soon run out. And it doesn’t seem particularly likely to score a big government bailout like the airlines got.
On top of those debts, AMC faces $5 billion in additional long-term lease obligations on its theaters. If the cinemas stay shut down, AMC may soon decide to renegotiate its leases and debt in Chapter 11, leaving its shareholders in the dark. To that point, on Wednesday, the company announced that it is meeting with advisers to consider options for restructuring the company.
Dave & Busters Entertainment (PLAY)
Most restaurant investors are feeling burned at the moment. The sector has gone into freefall over the past month, as the virus has had a brutal impact. Data from OpenTable suggests that restaurant reservations are down nearly 100% in all the markets it serves, both in the United States, and internationally. We’re not talking about a major slowdown in business here, we’re discussing a total stoppage.
However, while battered restaurant shares are a dime and dozen, Dave & Busters Entertainment (NASDAQ:PLAY) finds itself in a particular mess. That’s because the whole Dave & Busters business model is based around the entertainment part, namely video games. It also draws solid traffic as a sports bar.
However, this business model is particularly crushed in a pandemic. There will be no live sports going on for months, greatly dampening the bar scene. Meanwhile, video arcades are a tough sell in a climate where we are worried about catching germs. Dave & Busters desperately needs the virus to go away quickly and not make a return appearance this fall. Otherwise, its business will be cooked.
Of course, there’s a flip side to the problems that operators like AMC and Dave & Busters are having. If those companies struggle to pay their rent, who loses? The landlord does. And if you were already a struggling mall operator like Macerich (NYSE:MAC), this news could hardly come at a worse time. Macerich stock had lost 75% of its value in recent years, dropping from $80 to $20. Then the virus hit, and Macerich sliced its way down to just $5 today.
Macerich doesn’t have a huge overall corporate-level debtload, which is a plus. However, it has massive mortgages on many of its best properties. With operating income off its properties reduced dramatically during the shutdown, and perhaps longer depending on how many tenants fail to reopen, Macerich is in a vulnerable position.
The credit market is likely to be effectively closed to Macerich in coming quarters, making it costly to try to roll over debt on maturing mortgages. And asset sales would be exceedingly difficult in the current environment. Thus, Macerich will have to manage its financial obligations primarily from its own reduced cash flow. The longer everything stays shut down, the more properties Macerich may have to default on, giving up its malls to lenders during this trying time. The easiest solution for Macerich would be that its tenants survive this shutdown in one piece, and thus continue to pay rent. That, in turn, will only happen if the quarantines end soon.
A lot of tech companies have enjoyed an increase an usage or some other silver lining from the corona virus. Lyft (NASDAQ:LYFT) is not one of those companies. In fact, the virus has greatly aided chief rival its Uber (NYSE:UBER) while putting Lyft in a difficult situation. Lyft had slowly gained ground in recent years thanks to Uber’s controversies, particularly those related to its ex-CEO’s behavior.
However, Uber has now managed to regain its leadership position. That’s because Uber is now an essential service. Uber has become a lifeline for quarantined people around the world. That’s because Uber Eats delivers groceries and meals to people at home. Even if people harbored negative feelings toward Uber, it’s app is getting a lot of attention now given the circumstances. Uber has also reported a huge increase in driver sign-ups which should help its long-term prospects.
Meanwhile, Lyft isn’t meaningfully involved in the food delivery space. That means Lyft is effectively idled as ride-sharing demand has plummeted in recent weeks. In fact, Lyft is referring its drivers to Amazon (NASDAQ:AMZN), as Amazon needs extra logistics capacity. Will drivers and riders come back to Lyft once the quarantine ends? We’ll see. Regardless, it’s clear that the longer people become accustomed to using Uber Eats, the more Uber’s overall market share lead will expand even as things eventually start to return to normal.
Walt Disney (DIS)
Walt Disney (NYSE:DIS) has historically been a powerhouse company, and had a stunning stock price performance to go with it. And, unlike several other companies on this list, I expect Disney shareholders to once again enjoy outstanding rewards in future years. But let’s not beat around the bush, the corona virus is an absolutely awful blow the company.
The virus, in fact, is hammering just about every profitable piece of the Disney empire. Theme parks? Closed. Disney movies? Cinemas are dark. ESPN? There are no live sports to broadcast anymore. Merchandise sales? Down big with the malls not operating. Disney cruises? The less said of those at the moment, the better. And the list goes on.
Disney has one division that is still going gangbusters – its streaming video service. Unfortunately for shareholders, that’s the part of the business that lost hundreds of millions of dollars over the past 12 months. Over time, this quarantine may help attract more paying customers to Disney’s streaming offering. But it will do little to help Disney’s considerable cash flow shortfall in coming quarters. Disney’s profits took five years to reach new highs after the Great Financial Crisis slowdown. The quarantines threaten to provoke a similarly dour time for Disney’s shareholders in coming years.
Carnival Cruise Lines (CCL)
There’s been a great deal of debate within the investing community surrounding the cruise lines. On the one hand, their stocks are down huge amounts, think 80% or so from recent levels. On the other, there’s a not insignificant chance of bankruptcy. The government may help the sector, but the stimulus package from last week didn’t directly aid the cruise ship operators. The fact that the cruise operators are domiciled outside the U.S. to avoid taxes has served as a massive sticking point.
Regardless of whether a bailout comes or not, the stocks of the cruise line companies will remain volatile. Carnival Cruise Lines (NYSE:CCL) appears the best-positioned to survive. It had the best balance sheet coming into this mess and has had considerable success raising funds in recent days, albeit at a painful price. The secondary stock offering at $8/share was a particular blow, given that Carnival shares traded for $50 before the virus started.
All that said, Carnival desperately needs the world to start recovering from the virus quickly. The economic impact is obvious; the longer people are without jobs, the less disposable income they’ll have. But more broadly, there’s a branding concern here as well. The cruise ships, for better or worse, are deeply associated with this pandemic, as they were one of the first big sources of the virus’ spread outside of China. The longer we’re dealing with the virus’ danger, the more people are going to have long-running negative associations with the cruise ship industry. For this industry to return to profitability anytime soon, the conversation needs to shift away from the corona virus as quickly as possible.
Stocks to Sell: Under Armour (UA, UAA)
Disney and Dave & Busters aren’t the only companies suffering from the loss of live sports. For another example, look at Under Armour (NYSE:UA, NYSE:UAA) stock. Under Armour stock has lost more than 60% of its value over the past year, with the decline greatly accelerating in recent weeks.
It’s not hard to see why. Under Armour has spent heavily in recent years, paying up for quality celebrity endorsements. For awhile, this strategy was making inroads against Nike (NYSE:NKE) and other dominant players in the athletic apparel space. But Under Armour had already been losing traction over the past year.
Now, with the sports leagues, Olympics, and other high-profile events seemingly shut down until 2021, Under Armour has a big problem. It’s unlikely they’ll get sufficient return on their marketing budget. If you’re a huge company with a great balance sheet like Nike, this is less of an existential concern. But for a smaller scrappy player like Under Armour, it’s imperative that live sports come back as soon as possible. If parts of the 2020 professional leagues can be salvaged, it’d be a huge benefit to Under Armour. Otherwise, Under Armour could start running into cash flow issues.
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.