Let's play devil's advocate for a moment…
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| Sam Volkering | 29 April 2020 |
It's time to decide where to invest
Range… Breakout… Range… Corona
Over the last few years, Google stock looked like a staircase. Resistance around big numbers, then a breakout, then back to ranging before the next breakout. But coronavirus seems to have broken this pattern. Or maybe it has not…
| | Dear Subscriber,
Let's play devil's advocate for a moment…
Let's assume that sooner rather than later this imposed house arrest is lifted. That we begin to return to the way of life that we enjoyed before "The Rona" hit.
It's not a stretch to picture life without lockdown.
After all, it was only about 35 days ago when we had freedom and liberty. And dare I say, within the next 35 we'll be able to exercise that freedom and liberty again.
But return to that idea, that image in your mind of what life is like, post-Rona, post-lockdown.
What does the "you of the future" think about the decisions you made during this crisis?
Is the future-you proud of how you responded? Are you proud of the action you took, the decisions you made to sure up your future financial position?
Or does future-you have a few regrets? A few regrets that you didn't do anything and just rode it out?
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We all have regrets, you've got to learn from them
Regrets are inevitable when you're an investor. And anyone that says they never had any regrets is just lying to you.
I've got investment-related regrets. Not going harder into bitcoin in 2011. Trying to catch a falling knife and doing my dough in an investment bank that ended up failing in 2008. Not buying Amazon and Google in March 2009 when I had the money and the chance to.
These are the decisions we live with and we learn from. And it's what helps us to make the right decisions at the right time when the right moment strikes in the future.
Well, the moment is here now where I think you've got a decision to make. And I think this week may be the most critical juncture you might face for the next decade.
When it comes to opportunities to invest into the market, right now might be a window of opportunity you may not see again for another ten years.
While the markets have faced some incredible head winds, it seems as though the winds are subsiding. It feels like the sun is trying to poke through those stormy clouds… and clear, calm waters may be just on the horizon.
If that is the case, then my take is you'll want to start to allocate some of your capital into the industries primed for a bounce-back. And within those industries, the kinds of stocks that I think have the capacity to be the rockstars of the UK markets for the next decade.
When you're in an uncertain and volatile market, you have to really knuckle down on the kinds of companies you're picking.
Let's just say this was a somewhat "regular" market correction, or crash. In that sense you would want to make sure you really hunt down the kind of stocks that have strong balance sheets, good cash flows and have continued to be profitable.
These stocks provide a little bit of cover even if their capital value remains volatile and risky. If you're a longer-term investor, then you can afford to be a little capital-agnostic in that situation.
That means if you can stomach the capital volatility and find a company that's profitable and that even pays a dividend, you can sit a little more comfortably. That's because over time you expect two things: - Dividends continue and the payback of those begins to smooth out capital volatility. Importantly those dividends reinvest so that long term you have the effect of compounding returns…
- … on the proviso that you also expect that longer term the capital value of those investments will recover and even improve.
Just with profitable, dividend-paying stocks – real "value" stocks you can afford to have a bit more volatility in the mix.
But when a situation like government-imposed lockdown comes into force, that playbook somewhat goes out the window.
That's because even for some of the most "blue chip" companies, revenues aren't guaranteed, let alone profits or dividends.
In fact, in order to sure-up the balance sheet, dividends are the first item on the list to go. This is so the company can retain profits and keep the lights on when there's no money coming in the door.
The filter formula to find the rockstar stocks
The investment environment that exists right now doesn't mean there aren't still profitable companies out there. In times like these I think it's never been as important to find a company that's still bringing in revenues and can turn a profit while these conditions last.
That alone should be one of the most important metrics you look for in a stock right now. If they can make money now, and even look to remain profitable, that would be the kind of rockstar you'd want to really look closely at.
What would be even more elusive though is a company that's remaining profitable, still bringing in revenues and is in a lockdown-smashed industry.
"Lockdown-smashed" is the kind of industry that is directly impacted when we're all under house arrest.
Any kind of events company, retail, construction, hospitality, outdoor entertainment, automotive – all examples of industry that have been smashed by the uncertainty of lockdown.
These are the industries you want to home in on as the future of tomorrow, post-Rona post-lockdown, starts to look like more of a reality.
And if within those industries there are companies that have maintained revenue and even perhaps a profit, then those are the kinds of stock you really want to consider even more.
It's easy to do, you can even jump on to something like Yahoo Finance and run an equity screener.
Filter the region to the UK. Then select those lockdown-smashed industries. Within that add a filter for companies that have revenues more than £100,000 and net income more than £1.
That's a great starting point for some of the kinds of companies to really be looking at in a time like this. I found 23 from that basic search. But I know how to find others that you don't find on Yahoo Finance – and I'm telling you now, there are hundreds of companies in the UK market that right now are worth a really close look to add to a portfolio.
And tomorrow we'll have a look at a couple that fit the kinds of criteria I use when filtering out stocks during this crisis. The kind of stocks I'd run the ruler over closely and think about their potential long term as we exit this crisis.
In fact, I think with the impact of the last two months, the position of the UK economy and the UK markets, this might be one of the most exciting times to invest in a decade.
And it may be one of the biggest opportunities for the next decade to really make some smart financial decisions.
The last thing you want is to look back in another year, two or five, and regret not taking a more active approach in finding and investing in the right kind of stocks.
Regards,
Sam Volkering
Editor, Southbank Investment Research
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