Many of our users at Stock Card love investing in the companies shaping the future of humanity. Artificial intelligence, 5G technologies, and gene-editing are some of the most researched themes and collections on our platform. We support our users in their quest to invest in the future by maintaining a comprehensive database of growth potential across thousands of industries and markets. Such databases power the first box on Stock Cards' 2X2s, and our Head of LiveOps, Shama Patwardhan, is the steward of this database. When the COVID-19 pandemic hit the world, Shama took on the challenge of digesting the pandemic's impact on its potential. In this blog post, she discusses the result of her learnings and the adjustments we are applying to Stock Card's growth potential database.
What happened in the first quarter of 2020?
Currently, the world is going through a rare phenomenon. One contagious virus brought the whole world to a standstill. COVID-19 virus, also called Coronavirus, was first detected in November 2019 in China and spread globally. The first case of Coronavirus in the U.S. was found in January 2020. By mid-March, all the global economies came to a screeching halt. The properties of the virus made it more difficult to contain or monitor. The majority of businesses, manufacturing facilities, global travel, and retail operations shut down. Consecutively, panic ensued as the uncertainty about jobs and daily normalcy created growing anxiety. Governments around the world announced a "shelter-in-place" policy, and cities around the world resemble apocalyptic scenes of empty streets. There was no hum to the engine of the world's economy.
How did the world's growth get impacted?
The impact of the Coronavirus outbreak was felt differently by different industries and businesses. Some markets, such as airlines and cruises, were struck severely that the companies' survival in those sectors was and is still doubtful. On the other hand, some markets, like pharmaceuticals and digital communications, experienced a surge in demand, well-above the most optimistic forecasts before the COVID-19 pandemic. Such extreme and unexpected negative and positive impacts created the need to review the growth rates and potential of the markets, sectors, and industries that power Stock Cards, and modify them such that they represent a more informed state of forecasted growth.
Hardest hit industries: The decline in demand has severely burnt several industries. Due to the "shelter-in-place" rule, people stepped out of their houses only for essential shopping needs. This change in consumer behavior affected has hit some of the industries the most:
Highest positive impact: While some industries struggled to survive, some could barely satisfy the explosive demands for their products. Among several sectors and industries, some are benefited from an extraordinary surge in demand. Here are a few examples:
Adjustments to Stock Card's growth potential database
Stock Card's growth potential database typically includes three to five years of forecasted growth potential figures for each sector, industry, and market. However, due to the varied near-term impact of the Coronavirus outbreak, we added a new one-year projection to the database for 2020, to incorporate the effect of the impact. We applied short-term adjustment by first short-listing all the sectors, industries, and core markets negatively or positively affected by the outbreak. We then applied the appropriate adjustment factor to each one.
COVID-19 Impact Adjustment Factor
We started the process by quantifying the impact of a partial shutdown across sectors and industries. Researchers at George Mason University studied how the level of digitalization can be used to calculate and quantify the impact of COVID-19 on industries and sectors. The higher the digitalization, the lower the impact. Using the results of this research, a penalty of 2.78% for high-digitalization industries and a penalty of 5.56% for low-digitalization industries can quantify the impact of COVID-19 on sectors, industries, and markets.
Additionally, to incorporate the impact of social distancing on profoundly impacted industries, we took an additional adjustment. We reduced the resultant CAGR from the previous step by industry-specific projected decline percentage. We short-listed the markets that are profoundly impacted by social distancing such as airlines and restaurants and applied an additional adjustment factor to account for the impact. As of May 29th, 2020, we have calculated the rate based on a 3-month partial shutdown assumption.
The above two-step process resulted in a new short-term growth rate database to power Stock Card's growth potential bucket on our iconic 2X2s. Throughout 2020, we will monitor the state and the progress of the reopening of the economy. We would be revising this COVID-19 growth potential figures based on how many months the partial shutdown continues. We assumed that the new growth rates are applicable for at least one year until the economies resume their previous performance level.
The new 2020 growth potential database
The final result is a new 2020 growth potential database that we are pushing live on June 1st, 2020. The outbreak negatively impacted approximately 50 industries, and another 30 reported an unusual surge in demand. You would see the results by visiting any Stock Card page and clicking on the first bucket of any of the 2X2s. The video below shows how you can get to the revised growth of potential data on Stock Cards.
Industries and Markets affected by COVID-19
The COVID-19 pandemic has taken a toll on many sectors across the globe. The real estate sector is one of the hard-hit areas of the economy. As restaurants, bars, retail stores, and offices shut down around the world, landlords, property owners, and property management companies are going through an extended period of declining revenues. It is no surprise that the S&P 500 Global REIT index has fallen more than 30% since the middle of February 2020. In regular times, REITs (Real Estate Income Trusts) are some of the most popular types of securities investors hold for their abundant and reliable dividend income. However, the COVID-19 pandemic has caused many REITs' investors to question the reliability of investing in REITs. In this blog post, we share a list of reliable REITs worthy of attention despite the COVID-19 impact.
Aren't all REITs reliable?
When we published the COVID-19 investment resources, we discussed not every company can survive the COVID-19 pandemic. Those with ample cash and access to capital and manageable debt have the highest likelihood of going through the COVID-19 economic crisis and coming out of it ready to take off. The same logic applies to REITs. Not all REITs are worth your investment dollars. Some REITs have the operational strengths that can survive through the economy's cycles and keep rewarding the investors with a reliable source of income.
How to find Reliable REITs?
There are 335 REITs listed on the main U.S. stock exchanges. In the first step, we wanted to get rid of those with massive liabilities and debt. REITs with high-interest expenses compared to their earnings (EBIT) are the worrisome bunch. Companies with debt have to be able to cover the interest expense of their debt using their earnings. Just by using that as criteria, nearly two-thirds of REITs are out of the list. To make the search for reliable REITs even more precise, we applied a few additional filters:
Those criteria are pretty standard for evaluating companies with strong balance sheets. However, there is one data point that is particularly important for assessing REITs. For a non-REIT dividend-paying stock, typically, investors look at the stock's payout ratio. This ratio refers to the percentage of the company's earnings that is used to fund dividends. When such a rate goes above 70% to 80%, it is seen as a red flag. All companies need to reinvest a portion of their earnings to grow, and it's not an operationally savvy idea to borrow money to pay dividends. Therefore, the dividend payout ratio is an indicator of the sustainability of the dividend payment in the future. If a company uses almost all of its earnings to pay dividends, or worst, if it uses funds beyond its profits to fund its dividend payments, the sustainability of the dividend payment is questionable. The same logic applies to REITs. However, the usual payout ratio is not the right way of measuring the sustainability of a REIT's dividend.
Best Brokerage for Dividend Investors
REITs are one of the best dividend-paying investments. Especially if you choose to reinvest your dividend income back into your portfolio, gradually and steadily, you own more of the companies you have initially added to your portfolio. All you need to do is to sign up for a brokerage account that allows you to easily opt-in a dividend reinvestment option (a.k.a. DRIP). We like M1 Finance, particularly, for its easy ways of managing your account, including opting in a DRIP offer.
What is a FFO payout ratio?
Being in the business real estate, a REIT has a high depreciation cost. This cost is purely an accounting-driven number, and it is not an actual cash expense. Companies use depreciation to "expense" the initial capital they invest in acquiring the real estate over a few years. This accounting practice allows investment in real estate to be worthwhile by reducing the nominal earnings of the property or landowner and giving the owner significant savings in the amount of income tax that is calculated using the company's earnings. Because of this accounting practice, the earnings of a REIT are artificially (of course, legally) underestimated. Consequently, you cannot blame a REIT for having a high payout ratio and use it as a reason to skip investing in it. Instead, REIT investors look at FFO per share (Funds from Operations per share) and use that as a replacement for the earnings per share to calculate the company's payout ratio. Accordingly, we used the FFO payout ratio in our search for reliable REITs.
That adjustment in our screening process resulted in an additional 20 or so REITs that are reliable but would have been rejected if we used the standard calculations of the payout ratio.
Once we applied all the above-mentioned filters, the final results were a list of 32 REITs most likely reliable enough to go through the COVID-19 pandemic or any other economic crisis and come out of it without the need to cut their dividends.
The list is available to all Stock Card users on the Discover page using the "Reliable REITs" tag. You can access it by creating a free account on Stock Card.
Waiting for the stock market to reach its bottom, before starting to invest, is a mythical pursuit.
Our fellow StockCardians, since the start of the COVID-19 market crash, everyone is looking for the bottom. Many investors are waiting on the side until the market hits bottom before they invest. Of course, finding the bottom is a logical and intellectually satisfying strategy. However, in practice, finding the precise day or week that the market reaches its bottom and starts its recovery is mostly a mythical pursuit. In this long-form blog post, we'd like to share our approach in dealing with the COVID-19 market crash. Moreover, we will discuss the ways Stock Card can help you to invest during the COVID-19 crash. As always, if you have questions and comments, ping us on Intercom on our website, or send us an email. Our email is firstname.lastname@example.org. Let's get to our guide to investing during COVID-19 ...
Is it time to buy?
A wise man once said, and another wise man recently reminded us that "When the Time Comes To Buy, You Won't Want To." Boy, oh boy, he was right. Nothing seems right when you are pressing the "buy" button amidst a market crash. It doesn't help either that everyone is screaming at you to stay away from the stock market. These days investing in the stock market feels very uncomfortable. Despite that, is it time to buy now?
The short answer is, probably yes, with a few considerations. However, the short answer doesn't help much. Let's get to the long answer and hash things out.
Making investment decisions is a probabilistic decision-making process by nature. You would invest less when the odds of gaining outsized returns are not in your favor, such as the entire 2019. In contrast, you get more aggressive when the odds of success are in your favor. My fellow Stockcardians, the odds of investment success are in your favor simply because the stock market is sprinkled with reasonably priced stocks.
We recognize the boldness of the statement we are making in this post. There is no guarantee that the stock prices will go up from here. And, a few years from now, with the benefit of hindsight, we may see that investing now wasn't the best choice, and we could have waited for a few more months and gotten even better deals. But, we don't have a crystal ball that can show us the future, neither does anyone else. All we can see now is a stock market full of undervalued stocks that we would have invested in them even at 20% to 30% higher prices had COVID-19 hadn't happened. Regardless of whether the prices will continue to fall or not, the odds of success are in your favor if you invest at fair prices.
Why are the odds of investment success higher now?
As you know, on the Stock Card platform, we automatically collect, aggregate, and visualize the mathematical calculations that are commonly used to calculate the fair share price of a company. We use price to sales, price to earnings, price to free cash flow, and price to book value ratios, pull financial analysts' price target, use all that information to calculate companies' fair share prices, and compare them with the current prices. Those calculations show whether a stock is over or undervalued at its current market price.
On Monday, April 13th, there were 6,743 companies on the Stock Card platform. Those are publicly traded companies listed on NYSE, NASDAQ, and OTC markets with a market cap of higher than $300 million. Among them, and as you can see in the below image, shares of only 2% of the listed companies were overvalued. It gets even more impressive when you compare that number to February of 2020 when nearly 6% of the companies with a market cap of higher than $300 million, listed on NYSE, NASDAQ, and OTC markets, were overvalued. When we say the odds of success are in your favor, it's because the chances that you throw a random dart at the stock market board and hit an overvalued stock was nearly three times (6% over 2%) higher back in February of 2020, compared to April 2020. Imagine how much higher the odds of success would be if you take a meticulous look at each company and make an informed decision as to whether or not to invest in it.
Isn't it better to wait and see whether the market falls further?
Similar to every investor out there, we'd love to invest precisely on the day that the market hit bottom. Wait ... wait ... wait ... the bottom has arrived, buy ... buy ... buy ... What a brilliant strategy, except that we don't know where and when the bottom is. If we've learned anything from the preceding 11-year bull market, we know that market forecasts are almost always wrong. We can compare the market's movement with the historical crashes all day and night and try to predict where in the cycle we are, but it wouldn't give us any more concrete answers than an informed guess. While all market crashes recover, eventually, there is no telling where we are in the cycle because every market crash happens in a different economic context.
As an example, during the market crash of 2007-2009, it took the government nearly one year to come up with the $787 billion stimulus package to end the recession. The stock market started a slow descent in October 2007, with a big crash in September 2008, and the stimulus package came through only in February 2009. During the COVID-19 crash, the stock market started its descent late February 2020, and in less than two months, the stimulus cheques and loans have begun to flow through the economy. The context has changed so much, not sure for the better or worst, but a direct comparison between this market crash and any other market crashes in history is only directional correct and lacks context. And, timing the sequence of the market's movement is nearly impossible.
How to invest in the stock market now?
Knowing all that, how should we all invest in this period of heightened uncertainties? COVID-19's most dire impact on the economy is its unique speed. In a matter of one quarter, the demand for some sectors of the economy has fallen to nearly zero. Take airlines as an example. Compared to last year, the number of travelers going through airport TSA has fallen by 97%. Therefore, the source of immediate revenue for airlines has dried down. The situation is no better for restaurant, entertainment, or retail industries. The impact is not as drastic in other industries and sectors. However, a 20% to 30% decline in the revenue of a payment processor and credit company is not unreasonable. It's a no brainer to screen your investment universe for companies with enough cash on their balance sheet to compensate for the lack of revenue without the need to borrow money to fund the day-to-day operations. Focusing on companies with a strong balance sheet would drastically increase the odds of success in the COVID-19 era.
We built Stock Card to make your stock market research simpler, faster, and more fun.
Rules of the investment game during COVID-19
Before we wrap-up, let talk about the rule of the investment game during COVID-19. The rules are not specific to the COVID-19 market crash. However, they become even more important during a market crash. These are the fundamental rules that at Stock Card we don't cross. It is paramount to our success to draw the lines and not cross them at any cost.
Here are the seven commands of COVID-19 investing to make sure the odds of success stay in your favor:
Without a doubt, COVID-19 has brought dismay and sadness to millions of people globally. People have lost their lives, loved ones, and their jobs. One the one hand, COVID-19 has been a disastrous situation for many people. However, there is another side to the coin. COVID-19 can also be an opportunity, especially for stock market investors.
Warren Buffett once said, he has been lucky to go through a handful of stock market crashes. The COVID-19 market crash can be your lucky opportunity to build your wealth. At Stock Card, we agree that investing at the bottom of the market crash is an excellent idea. However, we don't believe there is a way to predict the bottom. That's why we focus on investing in well-managed companies, with strong balance sheets, at fair stock prices, and we do so as often as we can. The chances are that one of those investments would land at the bottom. That would be a fantastic coincidence. However, most of our decisions will occur during other times but the bottom, and that's okay with us. As long as we take the most advantage of the fair stock prices while adhering and accepting the rules of the game (see the previous section), we feel lucky to be an investor during the COVID-19 market crash. We hope you do so too!
Your Stock Card Team
We created this video in response to a question from Matt K. one of our newest users who wanted to know how to use Stock Card to find dividend-paying stocks. You don't have to keep Googling for your stock market research!
Don't forget to look up the Stock Card of your favorite companies, and while you are at it, make sure to visit our COVID-19 portfolio.
Today, during a brainstorming session at Stock Card HQ (virtual HQ), we were discussing the seemingly irrational movements of the market during the COVID-19 crash. Our very own Karen Sheng, Head of Data Science, who happens to be a professional trader too, walked us through her analysis as to where the market is headed. We thought you would also enjoy reading it. Thank you, Karen!
Reflection on the market from the perspective of a technical trader: The outbreak of COVID-19 and the subsequent nationwide shutdown has been a catalyst for an unprecedented correction of the stock market in a very compressed time frame. Hindsight is always 20/20. This post intends to shed some light on the market behaviors from the perspective of technical analysis. The primary tool used for this analysis is a Fibonacci retracement, which is commonly used to identify support and resistance levels. As we wrapped up a shortened trading week on April 9th, the S&P index was a few ticks away from a critical pivot point, the 50% retracement level at 2793.28. In plain English, the index has recovered approximately 50% from the recent swing low at 2194.83.
Where is the market headed to post-Easter? The nuanced answer is that, as a retail investor or trader, we don’t know; however, the Fib levels give us some guidance on where the target is going to be either way. If the market breaks through the resistance, the next resistance level is around 2934. On the other hand, it’s also likely that the index will pull back and test a new low.
Is there any evidence for such observation? For the short swing immediately after the all-time high, the index hit the 50% retracement level at 3125 and “puked” afterward.
What are the implications for investments? When the market plummets, an average investor would not know where the “bottom” is. However, cost-averaging in the accumulation of stocks in the sectors that are more resilient to the shutdown (e.g., tech sector) could have yielded at least some modest short-terms gains. When the market appears to be rallying again, it’s crucial to fend off the euphoria sentiment (“The bull market is back!” news headlines) and be aware of the resistance and possible pullbacks.
Don't forget to look up the Stock Card of your favorite companies, and while you are at it, make sure to visit our COVID-19 portfolio.