This “flash” bear has created some fantastic prices in record time. But are you looking for them?

 

Forget “the Dow” or “the S&P,” let’s get specific …

Norwegian Cruise Lines, down 82% …

 

 

Red Robin Burgers, down 82% …

 

 

Dave & Busters, down 83% …

 

 

The Alerian MLP ETF (tracks the performance of a basket of MLPs, which you can think of, simplistically, as businesses that provide the infrastructure for the U.S. energy complex). Down 58% …

 

 

One more. Beloved Walt Disney. Down 36% … in barely one month’s time.

 

 

Now, a question for you …

***Are Disney’s theme parks, resorts, rides, movies, brands, media properties (like ESPN and ABC), and merchandise-licensing now 36% less valuable?

 

Of course not.

But let’s dig deeper …

People are terrified of catching the coronavirus. Sporting events are called off. People are working from home. Vacations cancelled. Restaurants, gym, and retail locations are closed indefinitely. And yes, Disney has shut down its theme parks for at least the rest of the month in an effort to contain the spread.

Won’t this have a massive impact on Disney’s earnings?

Yes.

But will that impact warrant the 36% decline in Disney’s share price? Or might we see this as an opportunity — a chance to buy a world-class company at a price so low, we haven’t seen it since 2016?

 

 

Well, to answer that question, let’s dig into a few numbers …

Below, we see Disney’s revenues by operating segment for fiscal year 2019. Yes, “Parks, experiences and products” is a massive contributor. In fact, last year it was the largest revenue-contributor at 37% ($26.23 billion).

 

 

Now, interestingly, compare Disney’s market-loss with the percentage of revenues it receives from “parks, experiences, and products.”

As we noted earlier, Disney’s stock has lost 36% since early February. And its revenues from the Parks division?

As we just said, it’s 37% of Disney’s total revenues (in fiscal year 2019).

Note what that means …

The market is now pricing Disney as though all of its parks and resorts have been completely destroyed. Wiped off the map. Not one dime will come from them in the future.

Think about that.

Disney World, Disneyland, Epcot, California Adventure, Disneyland Paris, Hong Kong Disneyland, Tokyo Disneyland, Shanghai Disneyland, and Disneyland Paris …

They no longer exist.

Except, of course, they still do exist.

Pirates of Caribbean is still there. Splash Mountain hasn’t disappeared. The Haunted Mansion hasn’t gone anywhere.

And these beloved assets will continue to generate billions of dollars for Disney in the coming quarters and years.

The only difference is now you have the chance to buy Disney for a price that gives you these world-class asset — for free (based on February highs).

“

But Jeff, you’re being short-sighted. Disney will also see lesser revenues from ESPN since all sorts of sporting events are shutting down, and people won’t go to movies in the theater which will hurt that segment.”

That’s true — and it’s why I’m not claiming Disney’s share price shouldn’t drop at all. But 36%? After all, as just one counterpoint, if people are stuck at home, don’t you think Disney’s new, incredibly popular streaming service will see a sharp uptick in subscriptions? Which will likely enjoy strong retention even after the coronavirus threat has passed?

We don’t know the exact impact this will have on Disney, but we do know this world-class company will survive. We’ll eventually get a handle on the coronavirus. And when we do, people will flock back to Disney’s theme parks … sporting fans will return to the stands and power ESPN’s programming … movie-lovers will return to the theaters … and Disney’s share price will climb.

The question is whether you’ll have taken advantage when its price was lower.

As our CEO, Brian Hunt, wrote in an essay on crisis investing …

During a crisis, the only thing that changes about these valuable, lasting assets is who owns them.

Is this how you’re viewing today’s market volatility?

***We’re seeing the same kneejerk “sell!” reaction in the U.S. energy sector

 

In this case, we can’t blame the selling exclusively on fears of the coronavirus. As we noted in the Digest last week, the geopolitical conflict between Saudi Arabia and Russia has resulted in a huge drop in the price of oil.

Unfortunately, the impact on the U.S. energy sector has been massive.

Here’s the chart of XLE, which is the Energy Select Sector SPDR Fund. It holds oil heavyweights including Exxon, Chevron, ConocoPhillips, Schlumberger, Occidental, and Valero to name a few.

Down 54% in 2020 as of yesterday’s close.

 

 

Now, in this case, some of the fear-based selling is warranted. That’s because energy a highly-capital-intensive business. Given this, many U.S. oil producers have loaded up on debt to finance their operations.

But with oil prices having plummeted — and threatening to remain low for some while — certain U.S. producers won’t be able to generate enough revenues to meet their debt obligations and stay in business.

Last Monday, some debt-heavy U.S. shale-oil producers saw their bonds crushed as investors feared for their survival. As just one illustration, shale producer Oasis Petroleum saw the average price of its most-active bonds that mature 2022 plunge to $31.70 from $74 the previous Friday.

So, we do need to make a critical distinction here between the high-cost producers and the lower-cost producers.

 

***But if we focus on the lower-cost producers, then — similar to the case with Disney — have their assets suddenly become 54% less valuable here in 2020? Or might it be a buying opportunity?

 

Below, we see Occidental Petroleum — it’s a constituent of the ETF, XLE which we just profiled.

As of yesterday, it was down 74% since mid-January.

 

 

As I write, Occidental is trading at about $12 per share.

Now, how does this market price relate to its book value?

If you’re unclear, “book value” is the total amount a company would be worth if it liquidated its assets and paid back its liabilities.

Well, as I write, Occidental’s price-to-book value is 0.45.

So, let’s do the math …

 

 

After crunching the numbers, we see that Occidental must have a book value of around $26.67.

This means if Occidental closed its doors forever and sold all of its assets, that liquidated value would be worth more than twice its current market price.

Perhaps this is why legendary activist investor, Carl Icahn (one of Occidental’s largest shareholders), has just quadrupled his stake in the beaten-down company.

***Please don’t misunderstand — I’m not suggesting you run out and buy Occidental … or Disney

 

Occidental has its own challenges. What I’m trying to illustrate by highlighting it and Disney, is that this selloff might not accurately portray the futures of certain superior stocks.

Given this reality, instead of allowing fear to take hold and lead to kneejerk selling (or just sticking our collective head in the sand), we’d all be better served by trying to look at the situation objectively.

Is now the time to batten down the hatches and run? Or is now the time to begin looking for once-in-a-generation buying opportunities?

And remember, you don’t have to throw all your dollars in at once. In fact, you probably shouldn’t — after all, no one knows when the true bottom will come. Instead, you can scale in at different times with different tranches of capital.

But think of it this way — if you had to fill up your car with gas, would you be thrilled if the price had just fallen 50%? Or would you be terrified, waiting for the price to rise again before you felt comfortable enough to open your wallet?

Yes, we may not be at the bottom here. But we’re already seeing some great values in the market. Prices that would likely mean strong, long-term returns for certain stocks — even if they end up falling further before resuming their long-term climb.

Today, begin compiling your “must buy” list. I’m not saying go out and buy, but it’s not too early to begin looking at which stocks have been unfairly punished … which might make fantastic, wealth-generating additions to your portfolio in the quarters/years to come.

Bottom line, we have a choice — will we just survive this market, or benefit from it?

Have a good evening,

Jeff Remsburg