Wall Street has finally calmed down a little in the last few days as lenders relax repayment rules on what could soon become millions of newly unemployed workers. Volatility has finally receded.
I suspect that this is only the calm between the storms, or the eye of the coronavirus hurricane if you prefer. The S&P 500 is building a tentative base here, and as government stimulus comes in, fear will subside.
Then we can start the essential work of rebuilding. The market as a whole is down a harrowing 30% in the past month. Nearly all key stocks are down year to date (YTD), and most have dropped at least 20%.
If you consider Black Monday of 1987 a market “crash,” then the market has crashed. But as the coronavirus outbreak ravages the economy over the next few weeks, it’s worth concentrating on stocks and sectors that are actually working.
Whatever happens, these are the real safe havens. And environments like this are why they deserve a place in every balanced long-term portfolio.
Empty Shelves, Full Cash Registers
Stores across America and many other countries are empty. They’ve run out of food as people rush to make sure they have a stockpile of necessities in the event of a serious disruption.
Think of an earthquake, tropical storm or other natural disaster. When people can’t get to the store, they need to rely on the emergency provisions they have at home.
The car needs gas. The first aid kit needs to be full. And there needs to be a little shelf-stable food around to keep the household going until life gets back to normal.
It’s Life 101. But a lot of people were evidently so busy, distracted or lulled into a world of instant gratification that they forgot to plan ahead.
Then, when it looked like the restaurants would shut down, they all remembered at once. Every store that ran out of inventory fed the fever until people were grabbing enough raw meat and fresh produce to last months or, at it seemed to me, years.
Even with a big freezer, meat isn’t going to last for years. A lot of it will be wasted. You can be too prepared for any reasonable disruption.
Of course, that’s not how the supermarkets work. They bring in enough food to serve their shoppers for a few days, then bring in more and restock the shelves.
The goal is to run as lean as possible. Every box that sits on the shelf is dead money that could be deployed elsewhere. Inventory is a financial drag, not an asset.
But when every shelf empties out at once, the stores are left holding a lot of cash. They all need to resupply every department simultaneously.
It’s a strain on the system as every essential retail category liquidates. Stores still haven’t been able to restock. Butchers and bakers are working around the clock.
My point here is that the stores and the companies that make the things we buy are making a lot of money right now. Empty shelves mean full cash registers, and that cash will turn right back around and drive bigger restocking orders for the manufacturers.
Maybe in a few months, demand for boxed comfort food will hit a wall because everybody’s cabinets are stuffed. We’ll deal with that when it happens. For now, packaged food is one of the few businesses that is actually working.
We see it with the stocks. Barely 4% of the companies in the S&P 500 are holding onto a gain so far this year. Most are either supermarket retailers or the companies that dominate the shelves.
I’m talking about Kroger Co. (NYSE:KR), Walmart Inc. (NYSE:WMT) and Costco Wholesale Corp. (NASDAQ:COST), as well as Amazon.com Inc. (NASDAQ: AMZN), which sells a lot of consumer staples online and a lot of groceries through its Whole Foods brick-and-mortar chain.
Except for Kroger and Amazon, these stocks haven’t made shareholders rich in the last few months, but they’ve avoided the staggering losses seen elsewhere.
The weakest performer of the group, Walmart, has beaten the S&P 500 by 22 percentage points year to date. That’s worth cheering.
Then you have the manufacturers. Clorox Co. (NYSE:CLX), General Mills Inc. (NYSE:GIS), Hormel Foods Corp. (NYSE:HRL) and J.M. Smucker Co. (NYSE:SJM) are all green lights in Wall Street’s sea of red ink this year.
These stocks are hot right now because one way or another, the products they make are consumable. We buy them, we eat them or throw them away when they’re past their shelf life.
And then we buy more. As we clean, bleach bottles empty out and need to be replaced. Cereal, coffee and lunch meat get consumed. Money keeps flowing.
I’ll be talking about this in more depth on my radio show. Are you listening? (Click here for recorded episodes and local stations.)
The basis of the economy is food. In recent years, people got too busy to cook and felt rich enough to pay someone else to do it. Restaurant stocks proliferated.
I would not want to be in the restaurant stocks right now. Think it through. Every single restaurant in New York City and many other parts of the country is now closed to everything but takeout and delivery.
McDonald’s Corp. (NYSE:MCD) and other quick-service chains have drive-through windows. But others are less flexible to quarantine conditions.
Shake Shack Inc. (NASDAQ:SHAK) is a great example of what I’m talking about. It’s a great company and an iconic New York City brand. But New York City is locked down right now. Shake Shack stock is down a grim 43% year to date.
Only a few restaurant stocks on my screen have defied the trend. Most have a strong delivery focus, like Domino’s Pizza Inc. (NYSE:DPZ). If you aren’t delivering, you’re dead in the water.
And the habits Americans build now will influence years to come. Every meal that comes from the supermarket is stolen from the restaurant industry’s kitchens.
We only eat so many meals. The migration back to home cooking will kill a lot of chains while providing long-term relief to others that have suffered from too much aggressive competition.
Either way, the market remains stormy. These are only a few stocks in the carnage. At times like this, my 2-Day Trader shines.
Cannabis Corner: Dispensary Disruption
While every jurisdiction is different, most are considering non-medicinal cannabis sales non-essential. That changes the sales landscape a lot.
At this point, I would avoid all but the biggest cultivators. Smaller farms will get squeezed here because they lack the scale to compete with the giants and the resources to survive a slow season.
Ultimately, this is a great thing for the leader, Canopy Growth Corp. (NYSE:CGC). And in the here and now, it’s business as usual for Aphria Inc. (NASDAQ:APHA), which focuses on the medicinal market anyway.
If you want to play the cannabis space right now, that’s the way to do it. Avoid the others. The most interesting names will make it into my IPO Edge portfolio, and we’ll reap the rewards of their innovation over time.
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