Getting To The Other Side

The weekly narrative on coronavirus continues to change for the better, shifting from the ever-growing number of cases and deaths to enough of a decline prompting the state-by-state “Opening up America Again.” Social distancing, use of face masks and other precautionary measures will moderate as we move through the three planned phases if the number of incremental cases and deaths continues its downward path.

We also heard positive news last week from Gilead (NASDAQ:GILD) on a small phase 3 trial at the University of Chicago of its therapeutic drug, Remdesivir. Most of its patients had “record recoveries in fever and respiratory symptoms” and were discharged in less than a week. Gilead’s own broader trials plus those of the NIH should be known by the end of the May. We are optimistic that a therapeutic will be on the market within a few months, as well as an antibody test, and finally a vaccine within 12- 18 months. All good news!

Notwithstanding, we remain concerned that we do not have enough testing and virus-tracing capabilities. This means that opening America will remain limited far longer than most think. Businesses and families will not want to put their employees at risk and will maintain strict guidelines when and if we leave the safety of our homes. The government should work with Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) on implementing their covid-19 contact tracing apps. Clearly privacy issues need to be agreed upon first.

While the financial markets responded positively to the prospect of the “opening of America,” we are still forecasting that the shape of the recovery will be an elongated U. Both the Fed and government will surely need to do more over the next several months to keep businesses and individuals afloat. We continue to emphasize the winners on the other side in the new normal who will benefit directly and indirectly from more time spent at home. In addition, we added some financially strong companies with great managements and winning long term strategies such that they will gain market share, profitability and cash flow on the other side.

Many are bottom-fishing and though it may appear tempting, we would avoid doing it because we expect weaker demand, profitability and cash flow on the other side for many of these companies.

As of Friday morning, the number of coronavirus cases worldwide was 2,167,955 with 146,055 deaths with the U.S accounting for 676,676 cases and 37,784 deaths. It appears that the incremental growth of cases has peaked in the U.S, China, South Korea, Italy, France, Austria, Spain, Germany, Australia, New Zealand and Switzerland. Germany and other European countries, in fact, Germany and Austria have also announced plans to open, albeit slowly, while maintaining strict precautions.

It is important to note that while China just reported a 6.8% decline in the first quarter GNP; and business began to recover in March and has accelerated in April which has been confirmed by U.S multinationals including Starbucks, Nike, and P&G. Notwithstanding, China’s leaders have pledged even more financial and fiscal stimulus to offset weakness in exports due to a lack of global demand. Outside of the U.S, other nations inflicted by the coronavirus have committed trillions to support their domestic economies to make it to the other side.

The bottom line is that the world is awash with liquidity which forces investors to move further out on the risk curve. And, it is not over yet as we will need even more capital/loans/grants/individual payments to make it to the other side. The key to outperformance will be asset allocation and stock selection. We would not own bonds with duration over 2 years nor index funds. We still believe that the stock market will be higher over the next year, but it will be a stock pickers market over passive management for sure as change will be everywhere in the new normal impacting demand, profitability, cash flow and balance sheets.

We continue to believe that there will be a huge change in mindsets caused by the coronavirus. The new normal will be spending more time at home using the internet/smart devices for social media, business, education, shopping, et al which were heretofore done outside of the home. We expect the government to pay for smart devices for those who cannot afford them and support growth of wireless capability and 5G throughout the nation. The winners include those companies whose businesses are primarily conducted on the internet; semi companies that support data centers, the cloud, smart devices, 5G and gaming; and diversified technology companies who benefit from favorable long terms trends. Each of these companies have great management, technological leadership and financial resources to dominate on the other side. We also recently added to positions to companies that will benefit from slowly opening states which includes Home Depot.

We do not own bonds, the dollar, industrial commodities including oil, non-residential real estate, and financials including private equity funds whose asset valuation is at risk.

Remember to review all the facts; pause, reflect and consider mindset shifts; turn off your cable news; do independent research and …

Invest Accordingly!

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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