The ongoing coronavirus pandemic has caused chaos in the financial markets, with many quality companies seeing significant price drops.
Large market declines can cause fear and panic among investors who have seen their positions take a bit hit. On the other hand, some investors see these times as an opportunity to buy some quality companies at discount prices.
Impact of the coronavirus
The pandemic has caused all sorts of different issues for businesses across most sectors. Supply chains have been hampered, jobs have been cut (22 million Americans filed for unemployment in the first four weeks of the lockdown) and consumer demand has plummeted. While government aid will help certain businesses to survive, there will also be a lot of operations closing up shop for good.
With this uncertainty, it is important that investors don’t take excessive risks on companies that may not be around in another few years. Instead, focusing on companies with strong fundamentals, good track records, decisive management and optimistic future prospects is essential.
Disney: Bull vs Bear
Disney (NYSE: DIS) has been in business since 1923 and has successfully navigated many significant financial crashes. This time will be no different, as the company is well-stocked up on cash ($6.8 billion cash at end of 2019) and significant access to credit. While the closures of its parks (37% of total revenues) across the world and halted expansion into new markets are a big blow and its movie production segment has ground to a halt, there are other aspects of the business that are thriving.
Its new Disney+ streaming service has proven to be a hit as people are forced to stay at home. It has garnered more than 50 million subscribers since launching initially in the U.S. in November 2019. However, this only accounts for a max of $3.5 billion in revenue, nowhere near enough to put a dent in current losses. Disney does not expect its streaming service to be profitable until 2024.
A new CEO took over in February, just as the pandemic began, with Bob Chapek taking more of a numbers approach to the business than the previous CEO Bob Iger. Chapek will be able to steer the ship through turbulent waters for the foreseeable future and bring the company out the other side still relatively intact. Iger has come back on a temporary basis to help with these efforts. The decision was made in April to furlough 100,000 employees, saving the company about $500 million per month in staff costs to protect cash flow.
Following the outbreak of the pandemic, Disney saw its share price drop by 39%. While it has recovered slightly since, with the success of Disney+ to date and strong results expected once travel starts up again, it is certainly a worthwhile investment now.
Berkshire Hathaway: Bull vs Bear
Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) is another company that has stood the test of time. Under the wiley management of legendary investors Warren Buffet and Charlie Munger, the company has managed to consistently beat the market over many decades. Naturally, the longevity of Buffet (89 years old) and Munger (96 years old) is a concern for investors.
In advance of this pandemic, Berkshire had accumulated $128 billion in cash. Presumably, it saw some sort of trouble in sight for the economy and it wanted to have cash on hand to avail of opportunities when it did eventually happen.
The ethos of Berkshire is to invest in businesses that are stable, have a competitive advantage, strong management, and are trading at a perceived discounted price. This allows for an extra margin of safety and its results have shown over the years that this is a successful approach.
Its price fell by 25% after the initial outbreak of the pandemic, having recovered slightly since. Now seems to be the ideal time to invest as Berkshire takes such a level headed approach to its investing. In Q4 2019, Warren Buffet bought back a record $2.2 billion worth of Berkshire shares at the $204 to $220 range for Class B shares. He clearly thought that the shares were underpriced then and with the current share price being sub-$200, it certainly seems to be a time to buy into this tried and tested company.
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