Stocks are starting to get into rally mode—on the hopes the country has flattened out the curve.
And while we’ve seen a surge over the last two sessions.
There are still plenty of good companies which remain beaten up.
I’m starting to eyeball some stocks for my Total Alpha portfolio and even my personal retirement accounts.
Look, it can be difficult to buy these stocks when markets experience a freefall, and the global economy looks bleak.
But you have to stare fear in the eyes and just say: Not Today Pal.
You see, this is when the savvy trader starts to load up.
However, some stocks won’t recover, while others will take a long time to.
Allow me to explain to you how I find value, and what compels me to buy a stock for the long haul.
Table of Contents
The Three Keys To Survival
Do you know why most civilizations started near bodies of water? Location was the single most critical factor determining whether a society flourished. Large bodies of water provided a source of drinking water, food, and commerce.
So what is the equivalent to corporate bodies of water?
I see three main components that tell me whether a company will survive.
- Diversified Business Lines – For most of my life, I always looked at diversification as taking away focus from a company’s core capabilities. This epidemic is forcing me to rethink my ideas. Single-line businesses are the highest risk companies at the moment. Royal Caribbean isn’t likely to be around next year. However, Apple offsets hardware sales with music and content services, so at least they have some revenue generation right now.
- Minimal Operations – Many companies out there aren’t doing a lick of business. The Cheesecake Factory (CAKE) even said they wouldn’t pay rent this month on any of their locations. However, Wayfair (W) told the market that people stuck at home keep ordering furnishings. A fair amount of companies continue to operate at some level. That helps them retain both customers and talent, precious commodities in this market.
- Strong Balance Sheet – The U.S. government may have stepped up with loans to the business community. Yet, companies with large amounts of cash on hand will be able to fully take advantage of the same values we see as retail investors.
I understand that it may be tough to figure out who fits these criteria. That’s while I compiled a shortlist of some companies I want to own as they get cheaper.
Tim Cook faces a lot of obstacles at the moment. Supply chains have been disrupted. Customers may pull back spending. A huge portion of their workforce lives in Coronavirus hotspots.
Yet, the company has enormous amounts of cash to draw on. I’m talking $100b in cash and short-term investments. That’s more than the size of most major companies.
Regardless of the lockdowns, the company still ships orders to customers, and they continue to bring in money off their content services.
You can see how Apple’s services revenues have climbed over time to account for 20% of their total. Those revenues aren’t likely to disappear during this lockdown.
With such a strong balance sheet, I could easily see Apple picking up smaller startups for pennies that add to their long-term growth. They’ve got plenty of credit to pull on if they want to swing for the fences.
Southwest Airlines (LUV)
Airlines have been obliterated during this pandemic. Most states aren’t allowing for travel, while international flights have become virtually non-existent.
That’s why I like Southwest as they’re the best of the bunch. Southwest doesn’t have the international exposure that a lot of the other companies do. Their point to point business model seems much more likely to work as the patchwork of local economies start to reemerge.
I love the fact that they only have $1.85b in long-term debt, with over $4b in cash on hand. Compare that to Delta Airlines (DAL) with $2.8b in cash an$d 2.29b in long-term debt, and you can see why I like Southwest.
Let’s be honest – we’re all shopping from home right now. If you haven’t bought something in the past week, you’re probably an outlier.
No one is working with cash right now for two reasons. First, most transactions are moving online. Second, no one wants to touch cash since it could carry the Coronavirus.
Visa is a great company that continues to work at reasonably full capacity. Yes, transactions are down overall, but they aren’t getting cut out like other businesses. We all need to buy groceries, even if that’s our one outing for the week.
Selecting My Entry
With any of these stocks, I don’t have a particular price in mind. Rather, I plan to scale into these trades throughout the next several months.
In the meantime, they’ll be plenty of plays along the way. One of the best ways to get on board is with my Bullseye Trade of the week. This is my highest conviction trade, where I aim to get 100%+ return on the trade.