As an investor, there are two fundamental rules or questions that have to be answered accordingly at any time a stock of a company is hold:
a) Does a new situation, either temporarily (such as a
virus) or permanent (such as a crucial adjustment in law/regulation), change the
company’s business model?
b) Is the company valued attractively at the moment? This
not only includes certain ratios or multiples, but also takes into consideration
that the company will survive even in difficult times.
The idea behind question a) is mainly to figure out if the
firm will be able to deliver at least its historical earnings again in the future.
For instance, many banks or asset managers have still not reached their levels of profitability
since the financial crisis hit in 2008; hence their stock prices are still far
below the levels before the great crisis. Some of the banks have been able to
adjust accordingly; however, especially the banks or asset managers that were
highly dependent on tax heavens have not fully recovered (and will likely not
fully recover anytime soon, since their business model changed rapidly with the
automatic exchange of tax information among some countries).
The second question, b), tries to answer another important
aspect in investing. Nobody knows how long the current crisis will last, and
thus an appropriate margin of safety is needed. The cheaper the stock, the more
is typically already priced in. If it gets worse, the stock may drop further;
however, if the margin of safety is determined correctly (i.e. if the market
cap is considerably below intrinsic value), there must be a limit and support
is either coming from earnings or assets on the balance sheet – in particular
in a situation as we see it these days, the balance sheet plays a key role
(debt can hurt badly in certain moments).
By applying the set of questions above to the companies
presented earlier, we may come to the following conclusions:
-La Doria: As
producer of pasta, the company has benefited of additional purchases of daily
products (and panic buying). Nothing has changed in the outlook of the business
model and stocks are still cheap.
-Pizza Pizza Royalty
Corp: Business model may change even more towards food delivery; long term impact
could be positive due to savings in rental payment of its locations. Too early
to determine if company will be a ‘winner’ of this crisis. Risk/reward on
current levels well balanced.
-Swiss Water Decaf:
Volumes are still growing, new plant will already be expanded earlier than
planned. No dramatic change due to COVID-19 expected on business model. Dividend
was considered safe, unfortunately, the company suspended its dividend to
finance the expansion of the new plant with cash flow instead of debt. Short
term down, but long term when the expansion will be completed, the enterprise
should shine even more. Company trades significantly under its intrinsic value.
-Massimo Zanetti: Besides
the publication of the full year results 2019, there hasn’t been any recent news.
Business model also with COVID-19 fully intact and shares cheaper than ever
before.
-Kraft Heinz: No
long term change in business model estimated, short term impact may even be
positive.
In short,
it does not seem like any of the discussed companies will falter anytime soon.
From an investor’s point of view, the past few weeks have been extremely interesting,
and the pipeline with potential new attractive stocks is full (and to be shared
in due course)!
