The Other Side | Seeking Alpha

The coronavirus is still spreading at an accelerating rate in the U.S., but we remain convinced, based on data in China, South Korea, Italy, Spain and France, that the number of cases will crest here in the next 4-5 weeks. Unfortunately, deaths will continue to rise throughout the next few months. The simple truth is that we were not prepared for a pandemic nor were most other countries. There was a total lack of long-term planning and herein lies a lesson that will influence how we, as a country, hopefully move forward on the other side.

Sheltering at home is affecting how we think about what we do and how we do it. We have been forced into a new mindset in terms of how we think about navigating our lives. Everything has been affected: how we buy groceries, how we meet, how we conduct business, how we teach and learn, how we stay connected, how we conduct doctors’ visits and more.

This has been and remains our primary investment theme on the other side of the crisis. Use of the internet after the crisis will not go back to pre-Corona usage. Usage will be higher than ever for social media, shopping, business, entertainment, healthcare, legal/accounting, gambling, sports, and many other functions and services. The winners are obvious and make up the core of our portfolios. Data centers/semis, cloud usage, smart devices and 5G are long term beneficiaries, too.

It’s obvious to all that our government must plan with an eye towards the future rather than year-to-year. They must rebuild our infrastructure, strengthen our healthcare system and bring back production of key products like drugs, medical equipment, and rare earth minerals to the U.S. We cannot be totally reliant on foreign sources for anything. Mindsets have changed and herein lies a post-Corona investment thesis where we have just started to initiate positions.

We continue to refrain from investing in any company whose balance sheet will not remain strong on the other side. Many companies whose prospects were once favorable have been turned upside down by the coronavirus, losing money every day, and in need of big financial packages to just make it to the other side. We mentioned Carnival Cruise (NYSE:CCL) last week. The company paid 11% interest for debt capital and raised equity at $8/share down from over $50/per share just a month ago.

We still have no idea what the government terms will be for grants and loans to airlines, hotels, restaurants and many other industries/companies in need of financial help. How can we even consider investing in any industry/company in this unfortunate position? We are also concerned about the energy belt and non-residential real estate. Now that we see that brick and mortar workplaces are not always necessary for sales and productivity, we should see a decline in occupancy rates and value. Same goes for business travel. Global virtual meetings allow for immediate connectivity sans cost, exertion, and risk. Did you see that Cisco’s (NASDAQ:CSCO) WebEx had 324 million users in March, 300% greater than a year ago? Who needs to own Zoom (NASDAQ:ZM) at its lofty valuation?

As of Saturday morning, the number of worldwide coronavirus cases has exceeded 1,134,000 with more than 60,000 deaths. The U.S alone has more than 278,450 cases with more than 8,000 deaths. We continue to believe that all states should force social distancing, closing everything except for essential services. Governments, monetary authorities, businesses, and individuals have committed well over $6 trillion dollars to offset the loss of demand and income for most all so that they can make it to the other side.

Unfortunately, we don’t believe it will be enough, and we expect additional government and fed/monetary programs soon to supplement demand and income loss while maintaining sufficient liquidity in the financial markets. It is worth noting that spreads have narrowed in most of the bond markets which means that Fed policy is working, at least for now.

We remain optimistic, however, that there will be a therapeutic achievement by the summer and a vaccine by the beginning of next year. Testing is pivotal to check the virus spread; know where the hot areas are to move equipment/services; and to know when people can begin going out returning to their “new normal” lives. We can envision that companies will have all employees take tests before returning to work and will also take everyone’s temperature each day. Same may go before entering hotels, restaurants, stores, travel and all events. Wow, how life will change!

The markets hate uncertainty. Clearly, we are in a health, economic and financial crisis all at once. While 2020 will be a write-off year, we remain confident that our economy will begin improving, albeit slowly, in the third quarter if the coronavirus peaks in the second quarter as we still expect.

We are focusing on the other side – the new normal. We are investing on company’s earnings power in 2021 and beyond. Interestingly, the large tech stocks, which were under attack by the Federal and local governments a few weeks ago, are a key part of what is keeping America in touch in the “at home” world and will be the real beneficiaries of the new normal. What would we be doing at home without Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and so on?

And we need growth in the data centers and cloud so we have the bandwidth to handle all of huge increase in internet usage. That’s where the semis and data infrastructure companies come into play. Excitingly, here comes 5G which will increase functionality and speed of the internet. We are starting to build positions in financially strong companies that will benefit from a forward-thinking government which failed to anticipate a pandemic. That list includes healthcare which may gain assistance from the government for research and added supply line capabilities. Ironic, isn’t it, that the government will be supporting our healthcare industry?

Focus on investing in the winners on the other side and avoid companies in financial distress or have had a near term burst in demand which will subside once the virus passes. We remain flat the dollar, own no bonds and do not own private equity whose net asset valuation is at risk.

Remember to review all the facts; pause, reflect and consider mindset shifts; turn off your cable news; look at your asset mix with risk controls; do independent research and… Invest Accordingly!

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

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