Is this the recovery?
Is the stock market going to soar higher or fall back down to itsthe lows?
To quote Rhett Butler in Gone with the Wind: “Frankly my dear, I don’t give a damn.” And here’s why…
Earlier this year, the stock market plunged into a bear market in only a few weeks. It was the quickest bear market in history.
After reaching a low in March, the stock market stopped falling and shot up close to 40%.
I don’t waste my time trying to figure out the next direction of the stock market over the short term. I haven’t met anyone in 40 years that can predict the market consistently.
Instead, I focus on buying financially sound businesses trading at bargain prices.
Because during downturns, strong companies get stronger and weak ones wither away.
It’s like this: If a company goes into a downturn with a cold, it ends up getting pneumonia. But if a company goes into a downturn with pneumonia … it usually doesn’t end well.
That’s why I focus on companies that are in tiptop shape. As legendary investor Warren Buffett likes to say, when the tide goes out, you discover who’s been swimming naked.
In today’s video, I talk about the types of companies you should avoid. And I also share one industry that should do gangbusters over the next few years. Getting in now could be the best investment decision you can make.
Watch the video here…
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Have We Hit a Bottom?
Ok, so after the quickest bear market in history, the market hits a low on March 23 and then shoots almost straight up. The market’s up close to 40%.
Now, the question that people are asking is: Did the market make a bottom? And if it did make a bottom, what shape is the recovery going to be? Is it going to be a “V”-shape? Is it going to be a “W” — where it’s going to go back down again before it goes up? Or a “square root” — is it going to go down and then go up just a little and flatline?
I’m going to be honest with you, folks: I have no idea. Today, I’ll tell you why it doesn’t matter what shape the recovery is going to be, nor how much it needs to be for you to make money investing in stocks.
Ok, so now that the market is up close to 40% since the lows of March, keep in mind that not every stock is enjoying the ride. What happens is, during downturns, strong companies get stronger and weak ones wither away. If a company goes into a downturn with a cold, it usually ends up getting pneumonia. And if it enters a downturn with pneumonia, boy oh boy, it isn’t good. It doesn’t turn out well.
One Sick Stock
One example I want to share with you today is Hertz Global Holdings Inc. (NYSE HTZ). Hertz, the rent-a-car company, entered the downturn in not the best of health. It’s one of the largest rental car companies in the U.S., and it filed for bankruptcy protection just a few days ago.
Now, the COVID-19 outbreak really had an impact on the company, but it really was nothing more than the last straw that broke the camel’s back. Prior to the outbreak, Hertz was already having issues. Let me give you a little background on what those issues are. It really is important to separate what the problems were and what COVID-19 did — and how you can find companies that aren’t going through the same thing.
Hertz was losing market share to ride-hailing firms like Uber Inc. and Lyft Inc. In fact, back when I would travel, I would get a rental car. Now, at the airport I order an Uber or a Lyft — it comes out cheaper and more convenient. I don’t have to worry about the hotel charging crazy fees for valet parking. I don’t have to worry about where to park the car in strange cities. Uber and Lyft have taken a lot of my car rental business away.
So, that was problem No. 1. Now, Avis and Enterprise, two other car rental companies, were doing ok. Why? They’re better capitalized. They were also able to move faster and update their technology. They also had a newer fleet. They had the right mix of SUVs to sedans. Most people go for SUVs over sedans.
Hertz missed that one. It had more sedans than SUVs, and customers didn’t really want them. The fleet was getting old and tired. The cars were getting ugly, and oof, who wanted to rent them? It was starting to lose market share.
Also — this was the killer — it had $19 billion in debt. Now, when you have a rent-a-car business and you have 700,000 vehicles sitting in your lots, you still need to pay the leases on these cars — business or no business. And if you’re $19 billion in debt and no business is coming in, you’re having trouble.
It ran into trouble way before that, in 2012, when it acquired Dollar Thrifty. What was it trying to do? It was trying to take away market share from Avis, which had the leisure and travel market, and it didn’t work out. Last year, Hertz lost $58 billion, and that was its fourth consecutive annual loss. In addition, it lost four chief executive officers in the past 10 years.
You see, this company’s on life support. Bottom line: Overpriced mergers and acquisitions, poor fleet management and no direction catch up with you. And when the economy turns, it puts the nail in the coffin. Warren Buffett said: “Only when the tide goes out do you discover who’s been swimming naked.” And unfortunately, when the tide went out, Hertz was as naked as a newborn baby.
So now, COVID-19 is the tipping point. People now stay home. There is very little global travel, and domestic travel simply evaporated. Businesses, instead of traveling, started to use teleconferencing. Who knows if travel’s going to return to the pre-COVID-19 levels?
If you look at this chart, you’ll see Hertz is a destructor of value in a very short period of time.
Healthy Companies Are Out There
Now, how do you avoid investing in stocks like Hertz? The answer is easy: find companies that are nothing like them. In other words, invest in companies with strong balance sheets, ones that are financially sound, one that have manageable debt and ones that are gaining, not losing, market share.
Think about it for a second. Buying a stock is really buying a piece of a business because that’s what a stock is. You’re buying a piece of the business. So, if the business isn’t solid, then the stock will eventually follow the fortunes of the business, not the other way around.
Case in point: A few summers ago, cannabis stocks were all the rage. Some of them doubled in just a few months and then doubled again. But eventually, they all fell back to earth — some losing 60%, some losing 95% from their highs.
The reason is simple: the law of gravity. In this case, the stock price over the long term follows the fortunes of the business. Over the short term, anything can happen.
Most cannabis businesses were terrible businesses, and the stock price followed the business down. Tilray Inc. (Nasdaq: TLRY) was one of Wall Street’s favorites. It was a darling. It sold from around $22 a share in July 2018 to as high as $170 in October 2018 — close to 700%, or eight times your money, in 90 days.
But eventually, the fundamentals of the business caught up with the stock price and poof, down it went. Over the next year or so, the stock price fell to as low as $7 a share. That’s a decline of 95%, now recovered just a tad. It was a brand-new market, an exciting industry, a lot of hype … but eventually, a big letdown.
Unfortunately, we call this “the Wall Street waltz.” It happens all the time. Companies come into favor, cycles get excited, people get excited, industries get excited, everything goes up — and then, boom, the party’s over.
So, what would I do? I’d avoid sick companies. Avoid ailing businesses. The talk of new industries that promise huge returns and all that is fluff to me. I like to stick with investments that make sense over time. And I’ll give you one today, which I think is just a great long-term play.
It’s the Vanguard Health Care Exchange-Traded Fund (NYSE: VHT). Now, this fund has very low fees because it’s Vanguard. It’s 0.1% or 10 basis points, so it’s one-tenth of 1%. It tracks stocks of companies in the medical and health care industry.
Why do I like the health care industry? Because it’s a huge industry and it’s growing. A few years ago, it was more than $3.6 trillion, or about $11,000 for every man, woman and child in the United States. And it’s just going to continue growing. Over the long term, VHT should do very well.
So there you have it: Avoid sick companies because economic downturns just destroy them. Stick with strong industries with strong companies, and you’ll do fine over time.
Editor, Alpha Investor Report