Last month’s stock market decline was steep. Really steep.
The sharp fall presents investment opportunities. But investors will need to choose the right investment puzzle to solve.
For context, Singapore’s Straits Times Index (STI) started March above the 3,000 mark.
Within weeks, the Singapore index had fallen close to the 2,200 level.
The STI has since rebounded but many shares remain well below their respective share prices at the end of last year.
Sifting through the bargain bin
As Warren Buffett once said: “Price is what you pay, value is what you get”.
While share prices are generally cheaper compared to a quarter ago, not every stock is worth its price tag.
On the other side of the equation, determining the value of a business is becoming increasingly hard in today’s uncertain operating environment.
The rapid spread of the COVID-19 virus has resulted in countries closing their borders and governments implementing strict social-distancing measures.
The impact of these measures has been crippling for businesses.
As the outbreak worsened, companies both big and small started to withdraw their financial forecasts due to the uncertain economic environment.
Others, such as Singapore Airlines (SGX: C6L) and airline caterer SATS (SGX: S68), are worse off, and expect to post sizable declines in revenue and profit for the respective fiscal years.
In short, business conditions are hard. Very hard.
Given the challenges, companies can count themselves as lucky if they are able to maintain their last year’s revenue and profits.
The growth puzzle
Yet, there is a select group of companies that could post strong revenue growth despite all the odds.
According to Zuora, an evangelist for the subscription economy, around three quarters of online subscription businesses are either seeing limited impact or accelerating growth in revenue in the month of March.
In fact, over-the-top (OTT) video streaming subscriptions have grown seven times faster compared to the previous 12 months. OTT providers such as Netflix (NASDAQ: NFLX) could benefit.
That’s not the only area that is seeing accelerating growth.
Telco and utilities subscriptions, for instance, are expanding close to two times faster.
The soaring demand could translate into higher revenue for American Tower (NYSE: AMT) and Crown Castle (NYSE: CCI), which lease cell phone towers to internet providers in the US and around the world.
On the local front, bourse operator Singapore Exchange (SGX: S68) is seeing sharply higher volume of trades for both equities and derivatives.
The increase in demand for online services shouldn’t be surprising.
Around a third of the world’s population is estimated to be under quarantine. While most people may be working from home, they are still spending their money somewhere.
That said, the downside to buying companies that are still growing is that the price tag is likely to be steep.
If you pay up for growth that doesn’t materialise, the stock price could crash.
The turnaround puzzle
Beyond the lucky few, most companies will likely post a decline in sales or profits.
All is not lost, though.
The key question investors must ask is whether these losses will be permanent or temporary. If it’s the latter, the business could rebound once the outbreak is over.
Within this context, some companies are more resilient than their peers and have the financial capacity to endure a protracted downturn.
For instance, SATS had over S$100 million in net cash on its balance sheet at the end of last year. The airline caterer has also moved to shore up its coffers with another S$200 million in term notes.
As travel restrictions apply to all industry players, SATS may survive the coronavirus crisis better than most.
If SATS is able to come out stronger, the payoff for investors could be significant.
Historically, SATS handles over 80 per cent of the flights out of Changi Airport. Once the crisis is over, we could see a return to form for the Singapore-based airline caterer.
Fair warning, though.
The duration of the travel restrictions remains unknown and could last anywhere from the next couple of months to the next year. The longer it takes, the worse the business could suffer.
The puzzle investor must solve
The contrast between the growth puzzle and the turnaround puzzle comes back to the interplay between value and price.
For the businesses that are still growing, the key puzzle comes down to figuring out what has gone well for the company, and whether those factors can continue into the future.
After that, the investor’s task is to figure out a suitable premium to pay for growth.
For the turnaround puzzle, investors have to figure out what has broken down in the business, and whether that problem is fixable. Given today’s uncertain environment, that could be easier said than done.
Deriving the right price to pay could be hampered if we are unable to make a reasonable guess of the future value of the company.
And that’s the puzzle investors have to solve.
Choose your own investment adventure
As far as hunting for the next stock to buy, I will be spending most of my time looking for growth stocks.
Personally, I find the growth puzzle easier to solve.
Furthermore, companies that are growing tend to hold a leading position, possess the financial means, and have seasoned management teams driving it forward.
Figuring out the price to pay and how much to buy can be quantified in numbers.
On the other end, I find turnaround type companies harder to untangle. Business risk is also hard to size up in the current environment. And that’s why it’s not on my go-to list of stocks to invest.
I’m not saying that you should follow what I do.
Every investor should find their own approach that resonates the most with themselves.
You may, like me, prefer to pay up for growth companies. Or you could find solace in the confines of picking up turnaround stocks on the cheap.
Either way, do find the investment puzzle that you excel in solving. Then, do it over and over again.
That is how you do well in investing.
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Disclosure: Chin Hui Leong owns shares of Netflix, American Tower, Singapore Exchange, and SATS.
