A crisis of this scale makes for a scary setting to begin investing. It can also present golden opportunities for buying stocks at a huge discount. Nearly all companies will be caught in the storm, but the trick is in choosing the ones that will come out stronger.
The three stocks I’m watching this week are Johnson & Johnson (JNJ), Uber Technologies, Inc. (UBER), and Southwest Airlines Co. (LUV).
💉 Johnson & Johnson (JNJ, $134.00, +0.77%)
JNJ is one of the largest and most diverse healthcare companies, producing the band-aids you used as a kid to the Tylenol you need after a hangover. Lately, they are one of the front runners in developing a vaccine for COVID-19.
What to look at.
Wide Economic Moat - This means JNJ is very well positioned against their competitors.
Low Beta - Beta is an indicator of how much a stock changes with the market. Beta of 1 means the stock moves 100% with the market (if the market goes down 15%, the stock drops 15%). With a beta of 0.67, if the market drops 15%, JNJ will only go down 10%.
Decent Dividend Yield - JNJ’s dividend yield is 2.9%, meaning every year you get 2.9% of the money you invested in JNJ as cash. Invest $1,000, get $30 back. It might not seem like much, but compounded with returns, it’s great passive income.
Solid Trailing Returns - Trailing returns means how much of a return the stock gave investors over a certain time. JNJ’s 10 year return is 9.5%, meaning if you invested $1000 10 years ago, it would now be $1,095.
Why I’m watching it.
JNJ is a low risk investment that will generate a solid return over the long term. They have a wide moat in healthcare, with industry-leading products in drugs, medical devices, and consumer goods. And during big market movements, healthcare stocks tend to stay stable. The current market provides a rare buying opportunity for this stock. JNJ has generated a 9-10% return on investment over 10 years, and right now it is trading at a 6% discount. Not a bad choice as a stable long term investment, plus a nice 3% dividend to generate cash on the side.
🚕 Uber Technologies, Inc. (UBER, $22.55, -3.63%)
You know who they are. Uber is now a verb meaning to get anywhere, and Uber Eats is most likely keeping you alive right now.
What to look at.
Diversified Business - Uber has diversified their business, meaning they are doing other things besides rides. Uber Eats is an obvious example, but lesser known is Uber's ownership in foreign competitors such as DiDi (China) and Careem (Middle East).
Crazy Revenue Growth - Uber is well known for their aggressive, and often reckless, growth. Their revenue growth over the past 3 years is 54.4% which for a company valued at ~$40B is a crazy number.
Abysmal Net Margin - But that growth comes at a cost, as Uber burns cash to keep this growth up and fend off competitors. Their net margin is -60.1% meaning for every $1 they earn, they’re losing $0.60.
Currently Very Undervalued - Social distancing has hit Uber hard, sending their share price crashing to $22.55. Uber's reported fair value is $45*, showing that the market is undervaluing Uber's stock by 47%.
Why I’m watching it.
I'm excited about Uber. They get a bad rap (not without good reason), but they could be the future of mobility, from rides to food to freight. Their stock is down big time from their IPO price of $45, and I see this as an opportunity to "get in early" on Uber for the future. Competition is fierce in ride-sharing, and Uber needs focus. I believe their new CEO Dara Khosrowshahi has the experience to focus them on dominating the US market and then opening new business lines. At $22, I see their stock as a steal with a potential 50% upside. Uber's lack of profitability makes it a risky investment, but at the end of the day, you either believe in them or don't.
❤️ Southwest Airlines Co. (LUV, $29.00, -3.05%)
This major American airline is well known for its quirky staff and first-come-first-serve seating model. Flexible cancellation policies and superior service have earned it the love of many. But lately, Southwest, as well as other airlines are being hit hard.
What to look at.
The 52-Week Low - Southwest's lowest stock price over the past year was $29. That's the price right now.
Compare Competitors - Southwest is down 47% year-to-date. Compared to competitors like Delta (-66% YTD) and United (-77% YTD), they're holding up okay.
Abundant Free Cash Flow - This is likely because they have $2.96 billion in free cash flow. That means the money left over after a company pays its expenses. This cash can tide the company over even if airlines shut down for a month.
Low Debt/Equity Ratio - D/E ratio says how much a company is financed by debt (borrowing money) versus equity (selling shares). Southwest has a low D/E ratio of 0.29, meaning they have much less debt to pay back.
Why I’m watching it.
COVID-19 has crushed the airline industry, putting all airlines stocks on sale. In the case of Southwest, we're talking 50% off. Their strong operating history has seen them grow from a minor regional player (hence Southwest), to owning 25% of the US market. I look at their ~$3B cash pile and low debt and think they will come out of this in a position of strength compared to their competitors. A potential counterpoint is their exclusive reliance on using Boeing planes. Boeing isn't doing so hot (-63% YTD) after their 737 Max fiasco and companies cancelling orders. My thinking is that Southwest will fall further in the short-term, and once the coronavirus panic clears, we'll see it rise faster than their competitors.