While Many SPAC Deals Overload On Speculation, Some Are Worthy Of A Look

It says a lot about where we are in the cycle when sponsors of special purpose acquisition companies (SPACs) can easily and relatively quickly make tens of millions of dollars merely by taking a shell company public and choosing an acquisition target, before long-term success could ever be determined. But with the free market system we need to take the good with the bad (so long as legalities are considered), so as much as I think the SPAC structure is a strange way to accomplish a goal, it is probably short-sighted to write off the pathway completely and never consider investing in any of the deals.

Don’t get me wrong, assigning a multi-billion valuation to a revenue-less, concept company based on rosy hypothetical financial projections for 2026 makes no sense to me, but here and there we can find real businesses reaching the public markets through a SPAC. As with any other security, what is important to analyze is what you get and how much you pay.

And for some pre-deal SPACs, you can make a risk-free bet if the shares are trading below $10 each. Like the deal? Hold on for the long term? Hate it? Cash out with no harm done.

Specifically, I like some SPACs where the sponsors are legit and the shares are at a discount because we don’t know the target yet. Something like SPGS from Simon Property Group or RBAC from Oakland Athletics EVP Billy Beane. You essentially get a free call option on their process.

Some busted SPACs also look interesting post-deal. Wholesale mortgage lender UWMC can be had for $7 and change - quite a big discount to the deal price. If you think rates stay relatively low and housing demand will stay firm, it’s interesting.

And then there are announced deals that haven’t yet closed. The most intriguing to me is the local neighborhood social media platform Nextdoor, which fetched $4 billion+ from KVSB and only trades at a small (~2.5%) premium after peaking above $11.50 per share. A big multiple to current revenue with no profits? Sure, but longer term the platform seems to have staying power, a long growth runway, and numerous monetization opportunities. All for less than $5 billion; not bad in today’s market.

All in all, most SPACs get a chuckle from me, but it’s still worth looking at some because with the market trading above 20x next year’s profit forecasts there are fewer and fewer bargains out there.

Underlying Earnings Continue to Support Strong Market Action

Most of the commentary I hear around why the U.S. stock market has gotten off to such a strong start in 2021 focuses on governmental fiscal stimulus and the Federal Reserve’s intent to keep their target funds rate low for as long as the data can possibly justify doing so. While strong consumer spending will help businesses rebound from the pandemic, and low rates support elevated valuation multiples, I think the underlying profits being generated now, and those expected over the next 12-18 months are even more of a tailwind for stock prices.

As 2021 began I wrote in my quarterly client letter that consensus expectations for a record high S&P 500 profit figure in 2021 (easily surpassing 2019 levels), while certainly possible, didn’t seem like a sure thing. With the index trading for nearly 23x those estimates back in January, I was cautious about the potential upside this year.

It appears that cautiousness will prove to be unnecessary. Since January 1st, the 2021 profit forecast for the S&P 500 has actually increased (and done so meaningfully) from $164 to over $185. As the S&P has risen about 10% so far this year, profit expectations have been bumped up even more (about 13%). What that tells me is that the narrative of an economic boom post-pandemic (surely aided by government stimulus) is alive and well, and is very possibly going to result in absolutely stellar corporate profit growth.

While I would love for the U.S. market to be cheaper (we are trading at 20x 2022 profit estimates), I take comfort in the fact that the core fundamental driver of equity prices (earnings) is at least going in the direction it should be to justify these prices. Time will tell if the 2022 estimate ($208) can be surpassed as well, but if that number is in the ballpark, and the 10-year bond stays under 3% (plenty of room to lift from here without being a big deal), one can make the argument that the market generally is not in a bubble. And the recent calming down of the likely bubble in the profitless subset of the tech sector is a welcomed development too.

As is should be for those of us who focus on longer term fundamentals rather than day to day headlines, I think earnings will tell the story this year and next and for that I am thankful (until we have reason to fear a material economic slowdown).

Should Investors Freak Out About Interest Rate Normalization?

So far in 2021 the yield on the benchmark 10-year government bond has surged from 90 basis points to over 150 (hopefully you refinanced your mortgage last year) and higher rates have many investors concerned given the rapid rate of increase. Though the financial markets have become a bit more volatile lately, equities have been range-bound and peak-to-trough losses have not been more than 5 percent at the worst point.

So how much concern should there be about rising rates? Given that equity prices are a function of profits as much as they are about interest rate sensitive metrics like P-E ratios, I think we really need to look at the big picture. In that sense, a 10-year bond yielding 1.5% is pretty tame regardless of where it was a few months ago.

Right now the S&P 500 index trades for about 23 times projected profits for this year. If that metric seems high, it’s because it is. Pre-pandemic the S&P 500 traded for about 20x, the 5-year average multiple was around 19x and the 10-year average was around 17x. If we assume coming out of the pandemic-induced recession that interest rates will normalize and the market reverts to a 19-20x earnings multiple, then we can quickly conclude that stocks might be roughly 15% overvalued at present.

However, the reason why market timers have a bad track record is that there are several different ways that overvaluation could cure itself; a swift double-digit market decline being only one. Coming out of a recession only complicates this because corporate profits are rising again and fiscal stimulus at the governmental level is elevated, which makes the odds of an overshoot on earnings more likely than normal.

Since financial markets are forward looking, investors could very well be looking out to 2022 already, to get an idea of what a normalized profit picture looks like. What if earnings grow by double digits again in 2022? In that case, S&P profits could reach $190 next year, making the current 3,900 level on the S&P 500 look reasonable (the same earnings multiple we saw heading into 2020). While it is hard to see how the market is materially undervalued at present, there is certainly a path for a relatively calm normalization of profits and equity market valuation here in the United States.

While most are focused on interest rates right now, I actually think profits will hold the key over the next 12-24 months. In the 5 years pre-pandemic, when the S&P 500 averaged a 19x trailing P/E ratio, the 10-year bond averaged a mid 2 percent yield. Given the willingness of the Federal Reserve to keep rates low in the absence of inflation, I expect P/E ratios to remain high for the intermediate term. Whether stocks fall a bit, stay stable, or rise a bit, therefore, will depend on the pace of earnings growth.

And given that such a pace is likely to be strong in 2021 and 2022, there is a path for equity market valuations to normalize without a major market drop. Essentially, elevated valuations today can be corrected as long as corporate profits grow faster than stock prices over the next couple of years, which will result in a falling P/E ratio during economic expansion. With rates remaining low, equity investors are likely to accept such an outcome as a base case scenario and continue to allocate funds to stocks.

I would be much more concerned about a larger market decline (i.e. 20% or more) if we see profit growth sputter later this year and into 2022. Without consensus or above earnings, the path to a valuation normalization could become more treacherous.

I will leave you with some charts that show the relationship between rates and equity valuations over the last few economic cycles. I find them interesting because they indicate that recent equity market strength has not been vastly out of line with historical norms when interest rate levels are considered.

Author’s note: The charts below show P/E ratios for the S&P 500 computed using peak historical calendar year earnings, meaning that depressed earnings during recessions are not included. During recessions, earnings fall dramatically which increases P/E ratios and makes the market look more expensive even though stock prices have fallen. By using the previous cycle’s peak earnings instead, P/E ratios drop during periods of stock market weakness, which better denote the cheapness of stocks after large declines (see the 2008 period in the first chart as an example).

First, we have a chart showing the spread between the S&P 500 P/E ratio and the 10-year bond yield, which shows the large increase in stock market valuation during the late 1990’s dot-com bubble, as well as a return to high valuations in recent years.

While the last chart might make stock investors queasy, consider what it looks like when we add the absolute level of interest rates to the data. With rates falling generally over that period, rising valuations don’t seem as concerning.

The final chart below takes the one above and add linear trend lines for both datasets to show the long-term trend. Considering the slope of each trend line and what we would expect the relationship between interest rates and P/E ratios to be, the market’s pricing over time seems to have been quite rational (as rates drop, valuations increase, and in a relatively correlated fashion).

App-Based, Commission-Free Trading Fuels Bubble-Like Behavior

With each passing week I get asked more and more if we are in a stock market bubble. Since there is no one set definition, that is not the easiest question to answer. But if comparisons to the late 1990’s are the closest comp (the only bubble in stocks I have seen firsthand), it is hard to argue against the notion that trading action in the last year or so looks and feels like that period, though it might be narrower in scope.

In the large cap space, you have real businesses that are simply trading at sky-high prices, much like AOL, Cisco, and Dell 20+ years ago. Tesla is the easiest example, as they entered the S&P 500 as the 6th most valuable component of the index, which is just bizarre. Rather than topping out at 20-30x sales in they 1990’s, there are plenty of large cap tech firms now fetching 40-80x sales. Really tough to model the financials to map onto those kinds of expectations.

The small cap action is even worse, with Robinhood traders flipping penny stocks and bankrupt companies like it’s a video game, not a financial market. The latest example is related to Tesla indirectly; a penny stock called Signal Advance, Inc (SIGL). Elon Musk tweeted out a cryptic message “use signal” (referencing a messaging platform) and somehow people took that as an endorsement of this company, which is not related in any way. This was on Thursday 1/7 and SIGL stock surged from 60 cents to $5.76 per share.

Okay, so some people were just trying to be quick on the draw and make some money, fine. But then Friday’s trading session comes around and SIGL stock trades as high at $10 before closing around $7. That is not what is supposed to happen in a rational market. If SIGL was 70 cents two days prior, and it has been confirmed that literally nothing has changed with the company, the stock should go back down. But it didn’t.

Okay, okay, but surely when Monday rolls around and more people understand what is going on after reading about it over the weekend, the stock will drop, right? Not in a bubble. On Monday, SIGL shares rose to nearly $71 per share before closing at $38.70 each, up 438% on the day.

This is what a bubble looks like. Stocks don’t trade based on any fundamentals, but rather on near-term demand. Amateur “investors” are day trading these names on their phones, not using any kind of analysis or valuation, but rather just based on the notion that a stock might keep going up, so why not buy it? If SIGL can go from 70 cents to $7 in two days, when why not to $70 the day after? It’s gambling and the fact that you can trade commission-free on your phone only makes it easier for the silliness to continue.

So what can we expect to happen? Well, typically these traders just move on to the next stock after the last one stops going up, which will cause the price to be more rational. We have seen it with cryptocurrency stocks and marijuana stocks and now the hot sectors are things like electric vehicles (Blink Charging shares going from $1.25 to over $50 over the last 12 months) with Tesla’s meteoric rise. And obviously we can add bitcoin to the list, which is having its second insane surge in recent years.

How does it end? Well, market corrections typically do the trick. All of the day traders were wiped out in 2000 after the dot-com bubble burst because there was no way to make money anymore. Free app-based trading is here to stay, unfortunately, but once these penny stocks stop going up, traders will move on to something else and the marketplace will self-correct. There are plenty of examples of these huge stock price increases, but for those companies without the sales and profits to back up the valuations, there are few examples of the values holding for the long term. A few days, weeks, or months maybe, but rarely a few years. The majority of people who try and rise these things up will wind up selling at a loss. After a while, they stop trying.

Yes, it will end. No, it’s not healthy. And no, as a value-oriented investor I do not own money-losing penny stocks or software companies trading for 50 times sales. But that’s okay. There are thousands of securities to choose from and a diversified portfolio only needs a few dozen or so. If I want to gamble with my money, I much prefer going to a card table or sportsbook at a casino, though I understand that the pandemic has hurt the appeal of such forms of entertainment. Perhaps that too has boosted the appeal of stock trading for the time being.

Airbnb and Doordash: So Much For A More Efficient IPO Pricing Process

This week was supposed to be a coming out party for a new IPO pricing process dubbed the "hybrid auction.” Newly public companies have long complained that large first day gains for their stocks enriched institutional investors with immediate profits, with no corresponding benefit to the listing firms. Given that an IPO is often desired to raise additional growth capital, being forced to “leave money on the table” is a big disservice to these young firms.

Inefficient IPO pricing is not surprising given the actors involved. Companies are advised by investment banking firms, whose job it is to allocate stock to their large institutional clients. The incentive, then, is to keep your clients happy and instantaneous profits on day one certainly accomplishes that. While a higher IPO price would give the banks a bigger take on the total deal value, a company can only go public once. The ongoing long-term relationships the banks have with their buy side clients are far more profitable and important. As a result, the banks have little reason to price IPOs as close to market demand as possible. It is a simple conflict of interest situation.

This new “hybrid auction” idea was supposed to help with this problem. Rather than picking a price and then taking orders from investors, the new model does set an initial price indication, but it asks would-be buyers to not only submit how many shares they want to buy, but also allows them to offer the price they are willing to pay. The idea is to get a better gauge of demand by seeing just how high buyers will offer if they think a higher bid will increase their odds of getting stock.

Perhaps you can see the problem already. A buyer of an IPO wants to get the lowest price possible to maximize their potential profit. By giving buyers input into the price they end up paying, they have an incentive to keep the price low, without being insulting or risking missing out to other buyers. So, the most likely outcome is that buyers submit strong bids, maybe even a bit higher than the indicated price range, but without getting too aggressive. Therefore, the real demand is never determined, because you would be crazy to bid anywhere near the highest possible price you are willing to pay.

The results this week were therefore quite predictable (huge first day price spikes) but I think the end result was even worse than most would have guessed. DoorDash (DASH) priced at $102 and opened at $182 (+78%). The Airbnb (ABNB) deal was even worse, with an opening trade of $146, a stunning 115% above the $68 IPO price.

So what is the solution? Well, Google (GOOG) had the right idea back in 2004 when it opted for a dutch auction for its IPO. The company saw a first day price increase of just 18% because it decided to actually sell its stock to the highest bidder (what a novel concept!). A dutch auction simply sells the available stock at the highest price possible. Potential buyers submit a max buy price and a desired quantity and the IPO price is set to be the highest price such that there is a bid for every share being sold. For some odd reason, companies have not copied the Google approach. Until they do, they stand to keep leaving a ton of money on the table with nobody else to blame but themselves.

One innovation is worth mentioning as having been successful and that is the “direct listing.” Many private companies are profitable and don’t necessarily need to raise additional growth capital via an IPO. However, they still might want to be a public company in order to provide their shareholders and employees liquidity and also have a currency with which to make acquisitions. In a direct listing, the existing shares outstanding simply begin trading on the stock exchange, which opens them up to everyone. The market price is immediately known and there is no “first day pop” because no actual IPO price needs to be settled on (no new stock is being sold, so no price for a sale is needed).

The only possible downside for a direct listing is that all of the shares are dumped on the market at the same time and so it could be met with a large wave of selling early on. While not indicative of any problem at the firm, optics are important and a falling stock price will always raise questions. The solution, however, is quite simple. A rolling lock-up expiration - say, 10% of the stock each month for 10 months - would require holders to sell slowly over time to cash out, and therefore would have a minimal impact on the stock price.

So here we sit and Airbnb and DoorDash have two problems; 1) they left billions on the table, and 2) their stock prices are so high that it will be harder for them to attain the financial expectations that are embedded in the current price. Both of those are detriments to the very people they were trying to help with the IPO (their shareholders).

Will Stocks Really Trade at 22x Forward 12-Month Profits By December 2021?

Goldman Sachs just raised their year-end 2021 price target for the S&P 500 index to 4,300. That implies a 20% gain over the next year or so. The call got a lot of attention, perhaps unsurprisingly, as they expect an above-consensus profit figure for the index next year of $175 (current consensus calls for $165). Just as bullish, they expect stocks can fetch 22 times forward 12-month profits (estimated at $195 for 2022), which is where the 4.300 figure comes from.

There is a lot to unpack here. At first blush, both the valuation multiple and the profit estimate appear wildly optimistic. Predicting $175 of S&P profits in 2021, when 2019 was a record-breaking year registering just $157 seems a bit silly to me at this point. Historically, it takes more than 1 year for corporate profits to fully recover from recessionary declines (e.g. 3 years for the dot-com bubble and 2 years for the financial crisis). The pandemic seems severe enough that a shorter than average recovery might not be in the cards. Personally, I would be very surprised if corporate profits in 2021 surpassed those earned in 2019 (2022 would be a far more convincing thesis).

The other issue here is assuming a forward P/E ratio of 22 times, assigned to record-high profits. I understand interest rates are at record-lows, but if the economy really does recover swiftly in 2021, the 10-year bond rate will almost certainly rise from the current sub-1% level. If we return to 2% on the 10-year bond (where we ended 2019), there should be some downward pressure on valuations.

Stocks rarely trade for 22 times forward profits. Between 2010 and 2019, during which the 10-year bond hovered in the 2-3% range, the S&P 500 ended each calendar year at an average of 16 times forward profits, with the range being 13x-20x. In fact, I have data going all the way back to 1960 and the only time the S&P 500 has traded for 22x forward profits or more, during an economic expansion, was the dot-com bubble of the late 1990s.

If I was a strategist who was tasked with publishing S&P 500 targets (thank goodness I’m not), and I felt pretty bullish about where things were headed, I might be willing to project a 20x forward P/E. As far as profits go, let’s say 2021 matches 2019 and 2022 brings a profit increase that is double the historical average (12% instead of 6%) to account for pent-up demand from the pandemic. In that scenario, 2022 profits would be $176 and the S&P 500 at year-end 2021 would be quoted at 3,520.

I know what you are thinking; the S&P 500 is already trading at 3,560 today! See the issue? The market right now is pricing in a very optimistic outlook for the impending recovery. Put another way, for stocks to register above-average gains over the next 1-2 years (as Goldman is predicting), corporate profits need to show stunning gains and blow through 2019 levels by a wide margin.

Is that scenario completely out of the question? Of course not. Would I have a high degree of confidence at this point that such an outcome is the most likely? Not at all. Unfortunately, the market being near all-time highs now, before the economic recovery has really begun, means that a lot of good news is already priced into equity prices. Of course, markets are supposed to be forward-looking, so this is not surprising. But it should, and usually does, impact future returns.

Suicide by Robinhood User Shows Some Folks Should Consult With Investing Pros

The stories behind the Robinhood generation of investors is getting worse:

Rookie trader kills himself after seeing a negative balance of more than $700,000 in his Robinhood account

It seems that startups bringing free trades and app-based investing to the uninformed masses might need to be reined in a bit. The narrative in recent years has been that investing can be a low-cost, do-it-yourself kind of thing, where paying professionals a fee is a complete waste of money and only eats into your returns. Of course, that is only true if the small investors have as much knowledge and experience as the professionals and therefore would get zero value from the professional advice (that caveat is rarely mentioned in the same conversation).

Now yes, I am an RIA so I have a dog in this fight and you might say I am just talking my book here. But assets managed by RIAs are growing, not shrinking, and it’s not because the professionals are taking advantage of anyone. There are simply millions of people out there who know they won’t be very successful on their own because they lack the knowledge, time, and/or ability to take emotions out of the equation enough, and therefore they would rather outsource the bulk of the investing work to a pro (and gladly pay for that service). That is not to say that everyone will, or should, fall into that bucket. But many will and if you do not, then great, by all means manage your own portfolio.

Apps like Robinhood that have turned investing into more of a game like Candy Crush are making it easier for novices to venture into waters that are too deep given their background and skill set. As we saw in the story linked to above, such services probably need to have more risk controls in place and higher thresholds for advanced trading strategies (like dabbling in options and penny stocks). Instead, the opposite seems to be happening and they don’t seem to want to take responsibility (at least not yet - maybe that will change).

It reminds me of the social media companies who have created sites where anyone can sign up for an account (without verifying their identify), and then can post anything they want to the world (even anonymously). If bad things happen, the companies claim they are only serving as a platform for free speech and can’t control what people do or say. It seems pretty obvious that such a business model could pose real societal problems, but there was no plan to deal with that side of the equation.

While I can’t control what apps like Robinhood do, I can give advice. And on that front I say that only educated and experienced investors should manage their money entirely on their own without any help. That help can take many forms and does not have to mean you hire an RIA to manage your account for you while you close your eyes and pray for good results. I know myself and many pros that would gladly serve as sounding boards for investing ideas and/or in the role of a second opinion for those who want to make the final calls and actual trades themselves. If you have others to bounce ideas off of and to give you the opposing side of an investing thesis (or explain the downside risks in more speculative waters like options or penny stocks), I suspect your returns over the long term will be higher than they would otherwise. And that is even after you account for any advisory fees you might pay for such advice.

Just some food for thought… please be careful out there everyone.

Concerning Trends From Novice Investing Community

As if a global pandemic is not enough to worry about, there are troubling signs that the novice investing community is growing and trading, well, like one would expect novices to trade. If this does not remind you of the folks who quit their day jobs in the late 1990’s to become full-time day traders, it should. That did not end well and we have seen similar examples outside of the financial markets since. Remember when every day it seemed like ESPN was airing hours of World Series of Poker (WSOP) coverage from Las Vegas? There were a lot of people who quit their jobs to become professional poker players (I knew one personally) and it is safe to assume that most did not last more than a few months.

The signs in the financial markets have been growing. I wrote about the rapid and unexplainable rally in shares of soda bottler Coca Cola Consolidated (COKE) last May, which some attributed to small investors on Robinhood mistaking it for Cola Cola (KO) stock, which comes with the less obvious ticker symbol.

We are now hearing of grade schoolers who used to spend the bulk of their time playing Fortnite jumping into the Robinhood bandwagon, though it should be hard for minors to open real brokerage accounts (their parents would need to be the custodian for a UGMA account and hand over trading to their kid.

The result is some crazy trading action in low dollar stocks, regardless of underlying company fundamentals. Consider Genius Brands (GNUS) going from 30 cents to nearly $12 in about a month thanks to some turbo-charged press releases.

And then there are the rapid ascents and trading volumes of bankrupt companies, led by Hertz (HTZ), which was so stunned by the trading action in its own stock that it is trying to get permission from the court to sell fresh stock in order to help pay creditors in bankruptcy. The shares still fetch $2 each even though the company’s own disclosures explicitly state that they do not anticipate the equity being worth anything but zero. The company’s $1 strike puts expiring 6 months from now can be had for 65 cents, which is pretty good upside if one takes their risk disclosures seriously. We have seen similar moves in other bankrupt firms (e.g. J.C. Penney has tripled from its low of 11 cents).

With the S&P 500 only down 8% from its peak despite the pandemic, a resurgence of day traders among the novice crowd, and some crazy valuations in the tech-related space (any takers for Zoom Video at 37 times pandemic year revenue? How about 45x for Shopify?), it is hard to make sense of what is going on in the U.S. equity market. Some might try to keep it simple and come to the only logical conclusion; the risk-reward currently being offered by the market is far from overly attractive for the next, say, 3-5 years. Some professionals such as Jeremy Grantham at GMO are taking it even further than that.

Virtual Annual Meetings and Premature Bankruptcies

A list containing the number of ways this recession is unique is quite long, which is making navigating these waters as an investor much more difficult. While unrelated, below is a brief mention of two that are on my mind.

1) Virtual annual meetings

With in-person annual shareholder meetings cancelled, every investor can now attend meetings online without booking a flight and a hotel. Not all meetings are created equal. Some have long Q&A sessions for shareholders and in-depth slide decks, while others stick to business and offer little in the way of helpful data points for investors. So while it may be a hit and miss activity, for those companies you follow closely and are contemplating adding or shedding shares, look to take advantage of virtual meetings this year.

2) Premature bankruptcies

Navigating the corporate bond and preferred stock markets these days is really tough, as liquidity and solvency are tougher to drill down. Making it even harder is the fact that many companies appear ready to file Chapter 11 before they need to. They probably figure that the pandemic offers a great excuse and management can keep their jobs after the businesses emerge. Why not take the opportunity to clean up the balance sheet and be stronger coming out of this?

Consider Diamond Offshore, an offshore oil driller than just filed. The company disclosed assets of $5.8 billion of assets, $2.6 billion of debt, and cash onhand of $435 million, according to Bloomberg. In addition, DO announced that they do not need any debtor in possession financing and will use existing cash to operate while proceeding through court. I cannot recall a time when a company has filed with so much cash onhand and didn’t need a loan to continue operating. And they are not alone, JC Penney is reported prepping for bankruptcy despite having $1 billion of existing liquidity.

These are truly unique times. Good luck out there everyone.

Full Disclosure: Long puts of DO and JCP at the time of writing, but positions may change at any time

As Markets Stabilize While Peak Infection Rates Loom, Where Should Fresh Capital Go?

My last post highlighted the fact that the U.S. stock market in recent times has tended to find a lot of support around 15x trailing earnings. It appears that equities have calmed down a little in recent days, with a bottom having been made (perhaps temporarily) on March 23rd. On an intra-day basis (2,192) the valuation at the bottom was 14.0x 2019 S&P 500 profits. On a daily closing basis (2,237) it comes to 14.2x and on a weekly closing basis (2,305) the figure is 14.7x.

I am not going to predict that we have seen the lows. Even the experts in the field are merely guessing as to Covid-19’s ultimate infection path and even scarier to me is that I doubt health and government officials even have a plan for a slow loosening of social distancing guidelines, so we really don’t know what to expect from a economic rebound perspective. On one hand, I am comforted that the market did find a bottom around similar levels to recent years’ corrections, but on the other hand this situation is so much different than prior instances that I am not sure it is a very strong comparable event.

So rather than try and guess these things, like so many pundits in the media insist on, I think it is more helpful to think about where fresh capital could be deployed on a long-term basis as we wait this whole thing out. I am finding it too early to average down on more controversial existing holdings (travel-related, for example) because companies have not given us much data yet. Most have disclosed cash balance and credit line availability, but without knowing cash burns rates that only tells us so much.

So then the attention turns to businesses that are publicly traded, beaten down, and are less reliant on credit availability even if they are shut down. Essentially, high quality businesses that are on sale now but typically are not. Sure, there are examples in sectors where headwinds abound (Starbucks down 35%, for example), but there are more obscure ideas too. How about the few publicly traded professional sports teams? How confident are we that sports franchise values will continue to rise over the next 5 years? Even if seasons are cancelled, will the franchises lose 25-35% of their value for a significant amount of time? How often can small investors buy into sports teams at a big discount? Not often.

I know rental income in the near-term is problematic, but seeing owners of hard assets like real estate down 50-70% in a month is startling (and likely an opportunity). And you don’t need to go out and buy mall owners if you don’t feel inclined. How about Ventas, one of the leading owners of medical facilities? The stock is down 65% since February.

How about the big banks that were forced to be well capitalized so they could weather something like this? Jamie Dimon just went back to work after emergency heart surgery and JP Morgan Chase is widely considered the best-run bank in the world. It’s stock is down 40% from its 52-week high.

There are many companies I feel like I need for information from before I can decide whether to cut them loose or buy more shares. There are others where I feel like I can get comfortable given the low price, no matter how the next few months shake out. If you find unique situations where the franchise value is likely very secure and yet the stock is still down far more than the market itself, take notice. You might be surprised what you find. I mean, honestly, should Target stock be down 30% in this environment?

Happy hunting!

Full Disclosure: Long shares of Starbucks at the time of writing, but positions may change at any time