China is the country in the world that has been the most aggressive in combating COVID-19. But even China is disallowing large gatherings such as their education system’s most important examinations. Why? One of their medical experts, Dr. Zhong Nanshan, has the opinion that the virus can be suppressed but not eradicated. There’s something about the virus that makes it incredibly difficult to eradicate at the moment.
What China looks like right now will be the new normal until a better solution for the virus emerges.
- Far less people eating at restaurants.
- Airlines are operating at a very small fraction of their full capacity.
- There are no large gatherings- sports, movie theatres, cruise ships, etc.
- Factories are running and most people are back to work.
There is controversy over how Sars-Cov-2 spreads from human to human. China and South Korea believe that a significant route of infection is through aerosols; they are trying to safeguard against it as much as possible. The World Health Organization argues that the coronavirus is NOT spread through aerosols. Those who follow the WHO’s line of thinking generally do not take precautions against aerosols (unless there is an aerosol-generating procedure in the hospital).
As investors, we need to pay attention to these differences of opinion. Countries acting on bad advice may take far longer to contain COVID-19 in their country.
CT scans are a reasonable way to test for the coronavirus (SARS-CoV-2). While many developed countries have a limited capacity to perform PCR tests, developed countries have CT scanners that could be used to screen for COVID-19. Unfortunately, medical practices vary from country to country. Many developed countries chose to do very little or no testing instead of using a test that can detect COVID-19 cases 97% of the time (versus the first PCR tests in China detecting ~70% of infections). The CT scan can be a very useful tool in stopping the spread of COVID-19. Unfortunately, developed countries ignore it.
Developed countries are lagging behind in terms of creativity, resourcefulness and expertise. While they can try to emulate China (or South Korea) in trying to contain their outbreaks, they may have difficulty finding success due to the competency gap. I see a lot of uncertainty as to how long the pandemic will last in developed countries.
I’m not happy about the situation, but there are some very serious problems with the ways many developed countries have mishandled the coronavirus situation. In many countries, there isn’t enough screening capacity to help identify infected people. Most countries simply don’t have a path to containing the virus without having to shut down businesses. Worse still, most countries have delayed in taking decisive action and have missed their chance at containing the virus with minimal economic damage. Most of the world will turn to lockdown measures once their hospitals are flooded with patients.
You should also be aware that government officials have not been forthcoming about how big the problem is. Because most countries have limited testing capacity, many people have been turned away from testing. This means that the official confirmed numbers being reported are likely a fraction of the real number. The problem may be much larger than you think. On top of that, government officials are not being honest about how poorly they have handled the situation so far and how big the problem currently is. You should be angry that your government wasted time in responding appropriately to this serious situation.
Making things, worse, an unfortunate dimension to the epidemic is that some cultures will ignore lockdowns/shutdowns. All of Italy is in lockdown and the virus is still growing there despite the lockdown. Getting human beings in certain cultures to do the right thing will be a difficult problem. Some countries will have very serious problems controlling the spread of the virus. Other countries may have it even worse than Italy because they have not yet implemented serious measures to slow down transmission.
I haven’t seen a great primer on how COVID-19 impacts the businesses underlying stocks, so I’m putting down my thoughts here. Some key points:
- It is now pretty clear that it will disrupt the economy. Even if governments do not implement extreme measures, many consumers will. Most people will not go to retail stores and cinemas, causing them to have so few customers that they might as well close down.
- The virus has been successfully contained in China, South Korea, Hong Kong, Taiwan, Singapore, and Macau. These countries are working towards easing their restrictions and having life return to normal. In those countries, the worst has passed.
- Practically everywhere else, the virus is quickly spreading and is not being contained.
- The world is not ending. This is not the Spanish Flu and even that calamity did not cause stock prices to fall.
Gildan will be affected by coronavirus, but its stock may be interesting given that it is an above-average business with a low valuation (it would have a P/E of 10.3 in a non-coronavirus environment). It has some strong competitive advantages over its competitors that should hopefully allow the company to eventually expand beyond North America and to increase its market share in Europe (which is only a tenth of their business despite Europe having a greater population than the US and Canada). The stock has been a 30-bagger since 1998 although it has seen very little growth in recent years.
I don’t think Gildan is extremely undervalued at the moment. However, it can be worth watching the stock as the impact from coronavirus may drive the share price even lower.
Highlights from the production results:
- 2019 guidance lowered from 390-420k ounces to 340-350k. ¯\_(ツ)_/¯
- Mill capacity is excessive as throughput fell from 3562 tpd in Q2 to 3367 tpd in Q3 2019.
It’s incredible that this management team is still around. They have repeatedly misled investors and continue to destroy shareholder capital.
Nonetheless, despite all of the problems with Pretium’s management, the underlying deposit is probably one of the better mining assets out there.