Industries that will face the most bankruptcies in these crazy COVID-19 times

In this blog post, I’ll give my thoughts on industries that will almost certainly see many bankruptcies.  In general, the stocks with the most bankruptcy risk have some combination of the following:

  1. A fall in revenues because consumers don’t want to go out in public and possibly die.  Some industries will continue to be impacted even after a vaccine is developed (if it is developed).
  2. Fixed cost leverage.  Some businesses such as restaurants are locked into leases that will cause them to burn a substantial amount of cash.
  3. Debt.

These situations may be very difficult to analyze.  However, there may be opportunities in the mispricings such as going long restaurant franchises and shorting airlines, E&Ps, and the lowest quality lenders.  If an industry such as airlines has high bankruptcy risk, I will also talk about related industries even if they do not have high bankruptcy risk.

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MTY Food Group (MTY.TO): Fast food, faster growth

MTY Food Group is a collection of fast food franchises.  A large part of its growth has come from buying second-rate and third-rate food franchises.  MTY is a very good operator as purchased concepts have generally become much more profitable and have grown into much larger franchises since being bought.  The company’s CEO and founder, Stanley Ma, has been referred to as “the king of the food courts”.

Return on equity: around 22.75%.  (The company has virtually no debt.)
Growth in book value from 1996 to 2012:  21.5%/year.
Growth in share price from 2003 to today:  Over 100X.  (Yes, over one hundred times!)

*Disclosure:  Long 1 share as a tracking position.

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