Currently, the stock market is in a weird situation where most stocks have exposure to the systemic risk of COVID-19. As it is highly likely that social distancing will become the new norm, a long list of businesses will be badly hurt: airlines, restaurants, movie theatres, music events, conventions, lenders, etc.
If the COVID-19 situation drags on for 3+ years, you don’t want your portfolio to blow up because of it. It would make sense to put a good portion of your portfolio into less risky investments that will survive. Because individual stocks can blow up, it is a good idea to diversify (e.g. 10-30+ stocks). It’s also a good idea to avoid owning too many stocks with similar risks (e.g. stocks in the same industry, too much COVID-19 risk, etc.).
Stocks discussed: CNC, UNH, CHTR / LBRDA, TSN, HRL, COST, PGR, V, MA, MCO, SPGI, FB, GOOGL, IAC / MTCH, VRSN.
While this manufacturer of nitrogen fertilizers has sold off in the recent stock market crash, it is largely unaffected by COVID-19 and is positioned to see a small benefit from it. Regardless of how well COVID-19 treats CF (or not), the company will continue to be the lucky beneficiary of the shale revolution. CF is a low-cost operator simply because most of its manufacturing plants have access to cheap natural gas. Further advances in shale technology will improve CF’s profitability.
Keep in mind that CF is in a cyclical industry. I believe that the industry is set for another bull market run as there is very little new capacity being brought online.
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.
Liberty SiriusXM Group (LSXMA/B/K) is trading at roughly a 27% discount to its NAV. The latest investor presentation discusses the discount:
As LSXMA is actively taking advantage of the discount by buying back shares, the discount should resolve in due time. In the past, LMCA traded at a discount to the DTV (DirectTV) shares that it owned and that trade worked out well.
My Google Sheets calculations are here (it is updated with LSXMA/B/K’s latest share prices). Use File –> Make a copy to edit it. I own LSXMA shares. This is a bet on the NAV discount narrowing as well as a bet on Sirius XM (SIRI) itself.
While I don’t think that Dollarama is extremely compelling at the current P/E of 26.5, I do own the stock because I am trying to diversify. The company’s earnings growth is impressive and I like the new CEO, even though his father passed on the family business in 2016. And while the related party transactions continue under Neil Rossy, they haven’t meaningfully impacted shareholder returns in the past two decades.
Ocwen has gotten killed in the past few days, falling from $6.15 to today’s close of $2.27 (-63%). I actually have no idea why it fell so much. Things don’t seem as ugly as last year when it had issues with the NY DFS, CA DBO, and was in danger of losing MSRs due to its servicer ratings.
However, while Ocwen may potentially be quite cheap relative to liquidation value, it has not been very well managed lately.
- The commercial auto lending business is likely a mistake.
- They have lost their way and are wasting money on dumb things like $25M for strategic advisors.
- In my opinion, management is trying to hide #2 from investors. This is why their 10-K has unnecessary re-classifications of expenses.
Kinder Morgan does have some problems:
- Under its new CEO, Kinder Morgan has been stretching its numbers slightly.
- The big drop in oil prices will hurt the CO2 business.
- The big drop in commodity prices will lower infrastructure demand in the short term.
However, I think that the 60%+ drop in the share price YTD is a little overdone. Kinder Morgan’s problems don’t seem that bad compared to other companies.
Live Nation has various business lines associated with live music and live events. They are pursuing a strategy of vertical integration, trying to find synergies between the various parts of their business. On the concerts business side, the vertical integration strategy has been tried multiple times with little success. Will this time be any different? John Malone seems to think so. Liberty Media has been buying more Live Nation shares.
Let’s start with an overview of the ticketing industry.
(KXM is an illiquid Canadian stock with a market cap of $26M.)
Kobex’s liquidation value is in the ballpark of 70 cents/share and currently trades at 55 cents/share.
Kingsway Financial Services is going activist on Kobex Capital. This makes me like the stock a little more as the catalyst of activism should raise the internal rate of return on a position in the stock. However, I’m a little wary of activist investing mainly because management teams often like to fight activists with shareholder money. The legal fees and any severance payments will likely reduce the value that’s left for shareholders.
I previously described AAMC as a “royalty on yield chasing“. AAMC’s economics can potentially be extremely attractive because asset managers can generate extremely high returns on capital. Currently, the stock is trading at very depressed levels. Two explanations for the share price:
- Luxor capital and other major shareholders may be liquidating. Luxor suffered a lot of losses on the Bill Erbey family of stocks.
- AAMC generated close to no fees in the past quarter. Either you think that management screwed up or that there is a temporary hiccup in revenue recognition. Rental revenue, selling the home/mortgage, and marking the asset to BPO value all generate GAAP profits. There is a time period after a BPO (broker price opinion) and before a home is rented out (or sold) where the home will not generate any GAAP profits, which can result in less fees for AAMC.