Short-term prognosis
As the COVID-19 situation started to look ominous and the quantity of news on the topic reached overwhelming levels, I decided to mind-map thoughts on implications across each industry, and sub-sector. I then tried to link the sectors to large/prominent listed companies, so one could (seek to) quantitively track these ‘predictions’.
I’ve saved the mind-map here. Beware it is huge! If you have a monitor perhaps flip it to portrait. It was too big for linked-in.
Before I continue some caveats on that analysis:
- My views only. i.e. not those of my ’employer’.
- My expectations have not yet proven to be right (in that the market movements do not align to all the predictions – I discuss more on this below).
- I’ve RAG (red-amber-green) rated each sector. Green does not mean a share will go up, it just means I think that sector should be less impacted. Equally, not all colours are the same. Both OTAs (Online Travel Agents) and Cruise ships are red, but one faces an existential threat, while the other should rebound quickly.
- Some companies are hard to classify in a single sector due to convergence. Where I think important, I’ve tried to show certain relationships (for example, Meituan Dianping is both the biggest on-demand food delivery / listings platform in China, and also the largest Chinese OTA for domestic hotels by rooms).
- Not investment advice.
Assuming you’ve had some time to absorb the mind-map, the below is what actually happened across public markets (courtesy of Finviz – an amazing free resource).
Last three months movement in market cap
Source: https://finviz.com/
Why last three months? Because news of the virus started trickling in around 3 months ago.
‘Thank you for showing me that lovely RED Marimekko chart Barnaby’, i hear you say… ok, fair enough, how about this – market cap movement by sector (per Finviz’s categorisation):
Source: https://finviz.com/
This broadly aligns with the mind-map hypothesis (in terms of more/less impacted), though I was surprised / wrong (for now) on the following:
(a) Healthcare – overall fall in healthcare stocks during a global pandemic…? One nuance, I hadn’t appreciated was certain hospitals in the US are dependent on elective surgery. These procedures are being postponed resulting in falling revenues (In addition, it now also seems there is a risk of future litigation from healthcare workers, for not having been provided with appropriate protective equipment). However, I still can’t quite understand why the sector is down (pharmaceutical firms should in theory be doing well – perhaps less people catching the flu due to isolating?).
(b) Technology stocks – while declines in some stocks makes a degree of sense: companies/people will be seeking to cut costs so any ‘non-essential’ tech spend – which is any tech that does not enable remote collaboration or online sales – is likely to fall/be delayed, I had thought stocks like Facebook and Google would increase in value due to more ‘traffic’. In reality, they fell 26.11% and 19.74%, respectively.
Part of the reason for the 26.11% decline in Facebook may be explained in the charts below, provided by Social Fulcrum, a facebook and instagram advertising agency.
Source: https://socialfulcrum.com/
I.e. :
- Costs per 1k impressions (CPM) are down 44% (due to lower demand – presumably companies selling staples are supply not demand inhibited, and sellers of non-essential consumer goods are cutting advertising costs).
- Click Throughs (CTRs) are flat, and
- Conversion rates are down 53% (i.e. more people are surfing for entertainment)
- The net result is Facebook gets less advertising revenue, and the costs per purchase has increased. [NB these trends could be a reflection of Social Fulcrum’s end clients focussing on selling non-staples/non-essentials].
All this is to say… that the best equity analysts will be well and truly earning their keep over the next few weeks, when listed companies begin to release their 1Q20 results!
Impact of COVID-19 on due diligence
From a due diligence perspective (a large part of my work focus is helping clients successfully invest in private companies), some of what I am seeing includes:
- Resetting of valuation expectations. However, I don’t think the adjustments to private markets are yet at the levels we have seen for public companies.
- Certain deals being postponed, as investors take a ‘wait-and-see’ approach.
- For the braver investors:
- More requests for forensic type work on targets companies – and I think this will only grow given the Luckin Coffee debacle… As Warren Buffet put it “Only when the tide goes out do you discover who’s been swimming naked” – and no investor wants to find themselves in that position.
- Analysis of top line operating and financial metrics on a weekly basis (instead of monthly).
- Greater focus on fixed versus variable costs, and levels of potential cash burn.
- In respect of debt financing, greater focus on EBITDA add-backs and other covenants.
- More requests for Target companies to sensitise projections, for a range of downside scenarios.
- Greater focus on material contracts – creditors, debtors, supply chain risks.
Broader thoughts
I set out some glass half-full views in a previous article on Linked-in (COVID-19 & finding silver linings). Some of those thoughts have been more succinctly summarised in the table below – World 1.0 v World 2.0 – a light-hearted (in places) look at what is happening from an article posted by Tyler Cowen (and his anonymous source):
Source: https://marginalrevolution.com/
