Apple Is the Canary; Buffett Goes Kroger-ing
COVID-19: Greater Than Just Apple
Oh man … what a weekend! (There ain’t no party like a Presidents Day party. Am I right?)
But it wasn’t all George-cherry Jell-O shots and Abe appletinis…
In this midst of consuming my executive branch libations, I was struck with a thought: What would it take for Wall Street to wake up to the real threat posed by COVID-19 — aka the Wuhan coronavirus? (Yes, I can be one of those drinkers … occasionally.)
The financial media’s talking heads have largely downplayed COVID-19 and its potential impact … even after Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE: BABA) issued a stark warning last Thursday.
With all this denial, I increasingly feel like I’m trapped in a game of Plague Inc.
“Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated. As a result, we do not expect to meet the revenue guidance we provided for the March quarter,” Apple said in a press release this morning.
This is a sharp 180 for Apple. Just last month, the company issued second-quarter sales guidance in the $63 billion to $67 billion range. It’s now clear that Apple underestimated the impact of COVID-19.
Because of this sluggish manufacturing restart, Apple projects temporary iPhone supply shortages and a negative impact on global sales. Furthermore, all the Apple stores in China are closed due to COVID-19, and other retailers remaining open have reduced hours and considerably lower customer traffic.
If this Apple situation sounds awfully familiar (and it should to Great Stuff readers), that’s because it’s exactly what Alibaba warned about last week.
I can’t believe that I — the guy making financial memes on the internet — had to be the one to sound the warning. But, like I’ve been saying since this whole thing began … COVID-19 will impact the U.S. economy.
It will negatively impact the market. It will negatively affect your portfolio.
Today, we’re at the beginning of Wall Street’s acceptance. Take this statement from Bank of America analyst Vivek Arya, for instance:
“Greater than Apple,” Arya says. But even this assessment focuses solely on the semiconductor sector. Other massive supply chains are woven throughout China that affect nearly every industry. It’s not just semiconductor manufacturers in China that feel the COVID-19 pinch. It’s all of them, as Alibaba warned.
Semiconductors and Apple are just the canary in the coal mine. You may have seen that Walmart Inc. (NYSE: WMT) said in today’s earnings report that it was monitoring the outbreak. (We’ll get to that report shortly!) The world’s largest retailer said the virus hasn’t affected its outlook for the year, but it’s keeping an eye on the situation.
Some 15% of Walmart’s merchandise is manufactured in China. As this situation drags on, Walmart, too, will be forced to lower sales forecasts. It’ll be the same for retailers such as Target Corp. (NYSE: TGT) and Best Buy Co. Inc. (NYSE: BBY), which have extensive supply chains in China.
And this is just the impact as it stands now — assuming COVID-19 stays contained to China.
OK, Mr. Great Stuff, you have my attention. What do we do?
The first rule of COVID-19 investing: Don’t panic!
The second rule is to start pruning those speculative momentum positions in your portfolio. Ask yourself: “Do the companies I hold have solid growth and steady cash flow? Do these companies have too much exposure to the Chinese market or Chinese supply chains?”
The third rule is to get defensive. Make sure you have exposure to store-of-value assets such as gold, precious metals or currencies. The Invesco CurrencyShares Swiss Franc Trust (NYSE: FXF) is a good example if you’re new to currencies.
Finally, the fourth rule is to find an investing guide. I know I’ve harped on this considerably this year, but it’s true. You need a voice you can trust in the volatility that’s to come.
Banyan Hill expert Jeff Yastine is a voice of reason amid the choir of panic. In a sea of uncertainty, Jeff’s a rock of financial confidence. Over his 15-plus years of financial coverage, Jeff’s honed an eye for spotting true value that outlasts volatility.
When the market panics, Jeff will be there to uncover diamonds in the rubble — well-run and solid stocks trading for pennies on the dollar.
Remember, the best time to prepare for volatility was yesterday. If you’re still looking to virus-proof your portfolio, Jeff’s research is a perfect place to start.
(Pssst … by the way, Jeff’s about to unveil a different type of investment that he calls “Q Shares” … and they may be Wall Street’s best-kept secret.)
The Good: Buffett Goes Prepper
Some of you probably think I’m crazy right now. That’s fair enough. I’ve made fun of more than a few “Chicken Littles” in the past year. But tell me … do you think Warren Buffett is crazy?
On Friday afternoon, Buffett revealed new investments in The Kroger Co. (NYSE: KR) and Biogen Inc. (Nasdaq: BIIB). At the same time, he trimmed his holdings in Apple, Wells Fargo & Co. (NYSE: WFC), Goldman Sachs Group Inc. (NYSE: GS) and American Airlines Group Inc. (Nasdaq: AAL), among others.
Notice a pattern? Buffett trimmed his largest tech holding, an airline that’s exposed to Chinese travel and a handful of large investment firms — all of which will perform negatively due to the continued COVID-19 outbreak.
But what did Buffett buy? Kroger, a consumer goods grocer with little to no exposure to China, and a biotech company. Granted, Biogen isn’t directly working on a COVID-19 cure or vaccine, but it did just secure a major patent win against Mylan NV (Nasdaq: MYL), and it has a promising Alzheimer’s treatment in the pipeline.
Great Stuff doesn’t look all that crazy now, does it?
The Bad: Weakness at Wally World
Santa Claus left a lump of coal in Walmart’s stocking this year. The retailing behemoth reported fourth-quarter results this morning that came up short across the board.
Earnings missed expectations by $0.05 per share. Revenue whiffed by $820 million. Same-store sales rose a mere 1.9%, compared to the consensus target for 2.3% growth.
The lone bright spot was a 35% surge in e-commerce sales during the quarter. For the year, e-commerce sales rose 37%, topping Walmart’s own guidance for 35% growth.
But that glimmer of hope was immediately dashed after Walmart said it expects lower e-commerce sales for fiscal 2021. The retailer also put full-year earnings at $5 to $5.15 per share — well below Wall Street’s target of $5.22 per share.
As I noted above, Walmart doesn’t see any impact from COVID-19 … yet. It’s keeping an eye on the situation. Which is a nice way of saying that the company reserves the right to lower its forecast down the road … if things don’t improve soon.
They won’t. Expect a virus-related warning from Walmart within the next month or two.
The Ugly: Virgin Territory
Companies like Virgin Galactic Holdings Inc. (NYSE: SPCE) constantly remind me that John Maynard Keynes was right: The market can remain irrational longer than you can remain solvent.
Since Great Stuff last panned Virgin, the stock has soared more than 89%. Year to date, SPCE has rocketed more than 210% higher.
Yet Virgin Galactic has no earnings or revenue, and its rockets can only reach the bare minimum of what’s considered space. Today, the stock is rallying because Park West Asset Management announced it owns 4.25 million SPCE shares, or 2.1% of the company.
Virgin is also nearing the final stages of its flight test program, after moving its VSS Unity spaceship to Spaceport America in New Mexico.
It’s not that I don’t like Virgin or the space industry. It’s that I’d prefer to see the company’s revenue soar before its stock. Heck, I might even settle for a workable product with earnings prospects. Right now, Virgin has none of this.
I can see Virgin’s market — I just can’t see how the company will monetize it anytime soon. But, since it’s the only pure-play space stock out there, SPCE is riding headlines from SpaceX.
And that’s not a business model. Not at all.
Above, you can see the real reason that Virgin Galactic stock is soaring ever higher. That’s right. It’s SpaceX. Elon Musk’s side project has already completed several successful launches with its reusable Falcon 9 rocket design.
Today, the company announced that it’s pushing ahead with space tourism — watch out, Virgin! SpaceX will take four private space tourists into orbit for a five-day mission. The mission is slated to launch in late 2021 to mid-2022.
If only SpaceX were publicly traded.
Great Stuff: Marco?
It’s that time again!
That’s right, it’s time to feed the Great Stuff beast!
This week, we’re focusing on COVID-19 and the new space race. Be sure to write in to GreatStuffToday@banyanhill.com and let us know your thoughts!
Here are some of this week’s topics:
- Are you prepared for a potential COVID-19 black swan event?
- Do you think Great Stuff is sensationalizing the virus risks? Why?
- Is Virgin Galactic all hat and no cattle?
- Are you invested in Virgin Galactic? Would you rather invest in SpaceX, if it were publicly traded?
Now, you know the drill. You have about two days to drop me a line at GreatStuffToday@banyanhill.com to make this week’s edition of Reader Feedback.
Until next time, good trading!
Great Stuff Editor, Banyan Hill Publishing