Companies with low debt, strong cash flows and a lot of cash are best positioned to capitalize on a coronavirus recovery. At least three stocks fit the bill.
Google analytics show that people are searching for the term “stocks to buy” more than ever before – a sign that investors are preparing to buy the dip. It also suggests that, despite the fear and anxiety that prompted this selloff, many investors are overwhelmingly bullish.
But when the Dow is at multi-year lows and politicians are talking about shutting down economic activity for a period of months, what kind of companies are worth investing in?
The answer to that depends heavily on risk tolerance, but there are a few hallmarks of a company that can withstand just about anything: low debt, strong cash flows and a lot of cash.
Companies with some combination of those factors make worthwhile investments in times of trouble. Here’s a look at three stocks that meet these criteria.
When it comes to choosing top-quality stocks many people think of Apple (NASDAQ:AAPL) because of its infamous cash pile worth $207 billion. But while Alphabet’s cash hoard comes in lower at $120 billion, its lower debt obligations make it a potentially better investment.
GOOGL stock owes just $4.5 billion in long-term debt. That gives the firm a debt-to-equity ratio of just 2.26%— far below Apple’s 104%.
RBC Capital analyst Mark Mahaney pointed to Google as one of the best buys for investors concerned about liquidity.
Google’s strong cash flow coupled with hefty savings and low debt will help the company thrive in an economic downturn. Not only does it cushion Alphabet as companies cut down on advertising spend, but it allows the firm to invest in growth while others are battening down the hatches.
Mahaney says that with shares of Google stock down roughly 30% since mid-February, it’s a great entry point:
This is a wonderful opportunity here. It’s your chance to buy the highest quality assets, 25% cheaper. When you do decide to buy equities again, you can start there.
While all FAANG stocks offer a buying opportunity right now, Facebook and Google appear to be the best bets. Google edges out Facebook as a safer play because of its considerably larger cash pile— but there’s a lot to like about FB stock as well.
Perhaps the most appealing thing about Facebook is the firm’s lack of long-term debt. Not only is that a rare occurrence, but it removes a layer of uncertainty heading into the next few months.
There’s also the fact that Facebook relies heavily on advertising spend like Google, but isn’t as dependent on travel-related ads and may not be hit as hard by cutbacks.
Wedbush recently added FB to its list of “Best Ideas List” following the market crash. The firm noted that with people stuck at home and looking for ways to connect, FB is likely to see a bump in user numbers.
Given the seemingly unprecedented and unrelenting volume of news related to the global pandemic, the reliance that a large percentage of the world’s population has on Facebook as its primary source of information, and an increasingly-pervasive stay-at-home attitude accentuated in some instances by the government, we believe that many Facebook users have been accessing its properties at meaningfully elevated levels over the last several weeks.
The healthcare sector is inherently defensive, especially with Bernie Sanders unlikely to become the Democrat’s presidential candidate.
Despite that, insurers like Humana have been crushed in recent weeks. HUM stock is down nearly 40% over the past month, despite being in a relatively strong position for a comeback.
Humana’s cash pile is smaller than the rest of the firms on this list, but it’s still miles above the majority of companies on Wall Street at $8.7 billion.
Humana’s 1% dividend yield is nothing to write home about, but it’s still attractive given the company’s strong cash position. Plus, Humana’s debt obligations are notably smaller than its peers in the industry.
The firm’s debt to equity ratio is 41.26%. To put that into perspective, Cigna (NYSE:CI) has a debt to equity ratio of 70.35% and United Health’s (NYSE:UNH) is 63.89%.
Damien Conover of Morningstar had this to say about the healthcare industry as a whole:
The concerns around a global recession due to coronavirus disruptions are weighing on global markets, but the defensive nature of healthcare should hold up on a relative basis, and we don’t expect any significant changes to our healthcare moat ratings
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. As of this writing Laura Hoy was long FB and GOOGL
This article was edited by Sam Bourgi.
Last modified: March 22, 2020 4:21 PM UTC