The Covid-19 virus, and all the fears and uncertainty it has spawned, are throwing the markets into ugly turmoil and inflicting damage on the U.S. and global economy. It’s too early to know just how severe the damage will be. But at some point, the world will seem normal again, and there will be enormous opportunities, asserts growth stock expert Stephen Leeb, editor of the industry-leading advisory service, The Complete Investor.
At some point, the world will seem normal again, and there will be enormous opportunities. Admittedly we’re dealing here with a ton of hypotheticals. But here we want to focus on one thing that’s not hypothetical. It’s that whatever damage the U.S. economy suffers, today’s high level of corporate indebtedness here will be a huge part of it. Companies with the most debt will be the most vulnerable. In contrast, companies not burdened by debt will be able to better weather the crisis and emerge from it ready to surge.
Since the Great Recession, non-financial business debt has grown by 60% to $16 trillion. When you include debt of financial companies, the total tops $32 trillion. Debt in the hard-pressed energy sector alone amounts to nearly $2 trillion. These numbers could easily dwarf any stimulus, especially if the big plunge in economic activity is not followed by a quick recovery.
Repeatedly in recent months we have stressed our low-risk hedges, and the current chaos makes them more essential than ever. But a concurrent strategy, one that looks to the longer term, is to seek out companies that have particular potential to win big whenever the economy rights itself. Such companies should meet two key criteria.
First, they must be leaders in growing industries, meaning that once the economy recovers, they have strong growth prospects with little fear of competition. And as indicated above, they must be cash-positive, meaning either no debt or plenty of cash to cover any debt.
Meanwhile, Regeneron Pharmaceuticals (REGN), a long-disappointing stock, has begun to right itself. The major reason for its poor performance was potential competition for the company’s most important drug, Eylea. It is the No.1 treatment for macular degeneration, the leading cause of blindness in elderly and diabetic individuals.
Now it turns out that the potential competing products have serious side effects that are not found in Eylea. That means that the company’s most important franchise will have a growing market to itself. This should boost growth by two to three percentage points.
In our opinion the company’s research remains the best in the industry. Its Dupixent drug, introduced in 2017, is proving to be an effective treatment for autoimmune diseases that range from severe dermatitis to asthma. More recently, Libtayo has been approved to treat certain types of skin cancers and is in trials for other types of cancer.
The company also has just announced that another autoimmune drug, Kevzara, is in trials for treatment of Covid-19 complications. The Chinese have evidence that most deaths from the disease come from an overactive immune system once the infection advances to the lungs.
The molecular makeup of Kevzara, which is used to treat rheumatoid arthritis appears well suited to treat the overactive immune response associated with Covid-19.
China and other Asian countries appear to have either quelled the coronavirus or were largely unaffected in the first place. Our nearly 20% growth estimate for Alibaba (BABA) factors in the effects Covid-19 on the economy.
Because the company is China’s leading online retailer, it was hurt far less than companies in other industries. But Alibaba is much more than a retailer. It’s also a leader in cloud development, artificial intelligence, and digital payment.
These areas promise to be important drivers of China’s economy for the foreseeable future. The stock’s forward P/E (2021) is in the mid to high teens. The company’s superb balance sheet complements its growth prospects.
Taiwan Semiconductor (TSM) is a critical cog in the world’s IT market, which includes everything from the internet of things to AI to 5G to servers.
It is at least a year and possibly two or three years ahead of the competition in producing ultra-dense integrated circuits. The demise of Moore’s Law has meant it’s no longer possible to design ever faster chips, but denser chips do more tasks while using less power.
The company’s exceptional balance sheet and steady free cash flow have translated into double-digit dividend growth and a current yield above 3.5%. If — when — the world resumes its growth, Taiwan Semi has an assured and leveraged place in the comeback.
In a world desperate for cybersecurity, the offerings of Fortinet (FTNT), which serve small, medium and large companies, stand out. The company’s margins now lead the industry — a powerful sign of competitive advantages.
Moreover, because its products can be used in companies of all sizes and its growth is surging across geographies, its potential market is enormous. Consensus growth projections of 16% will prove light unless the economic downturn is much more severe than we anticipate.
Finally, for Apple (AAPL) and Microsoft (MSFT), their franchises, which cover vital parts of information technology, will be unaffected by the economic turmoil.
In both cases our growth projections could prove conservative in the context of a recovering economy. Their balance sheets give them enormous flexibility to take advantage of the current downtrend with potential acquisitions.
Berkshire Hathaway (BRK.B), which we discussed in Monday’s update, meets our criteria both as a low-risk hedge and as a company that will grow in the happier times that we hope lie ahead.
AUTHOR…INVESTMENT ADVISER…MONEY MANAGER
Stephen Leeb is a prolific author, investment adviser, and money manager who has been analyzing financial markets for more than 40 years. He is known for his prescience in connecting the dots among hidden or overlooked trends – macroeconomic, scientific, and geopolitical – and accurately describing the investment implications, often going against the conventional wisdom. He is the author of nine books on investing and geopolitical trends including his most recent book, China’s Rise and the New Age of Gold: How Investors Can Profit from a Changing World (2020, McGraw-Hill Education). He is founder and editor of the award-winning investment letter The Complete Investor, published by Capitol Information Group, a Washington, D.C.-based financial publisher. Stephen is chief investment officer of his own wealth management firm based in New York City.