As a seasoned stock investor, you didn’t panic and sell during the March stock market correction. The downturn was swift and brutal, but now it’s two months later, and you’ve recovered at least half of what you lost in March. There’s light at the end of the tunnel. The stock market continues to exhibit a willingness to rise in the near term. I’m seeing constructive price chart patterns on both the S&P 500 index and on many individual stocks. Now, it just comes down to picking good stocks!
Previous stock market corrections tended to be about excesses in housing or financial markets, or inflation, or they were simply long-overdue pullbacks after overextended market run-ups. But our current stock market situation is completely different from any stock market or economic problem that’s previously occurred in your lifetime, so we can’t just buy low among famous companies and ride them back to their previous highs as we normally might do.
Let’s think about adjusting your portfolio for the pandemic economy that’s at your doorstep. There are two key factors to consider when picking good stocks in 2020 and 2021. We want to focus on companies that will be able to bounce back more swiftly as businesses reopen, and avoid companies that will be more critically wounded by the business lockdowns and unemployment.
Industries to Embrace
All is not lost! There are plenty of industries that will continue to earn money and pay their bills, despite a couple of quarters of bad earnings. First off, look toward technology companies. No matter how bad the pandemic got, people’s use of electronics, cell phones, computers and televised entertainment continued unabated. There are many great, profitable and growing companies in these fields. Companies like Apple (AAPL), Netflix (NFLX) and NVIDIA (NVDA) are here to stay.
Consumers will continue to pay for medical care and pharmaceuticals; food and household staples; natural gas and oil products; and financial services that include investments, life insurance, annuities and property & casualty insurance. Businesses will continue to pay for energy, infrastructure, manufacturing, technology, advertising and employee benefit services.
Industries to Avoid
Retail apparel specialty stores and department stores lost their spring selling season. They paid for merchandise to be manufactured and delivered, long before the pandemic arrived, but they closed their doors to shoppers during the winter. As stores finally reopen in the coming weeks, spring clothing will be sold for pennies on the dollar because retailers will need to make room for the summer merchandise that consumers will be craving.
Apparel companies and department stores will take a huge loss on the merchandise that they were unable to sell. What’s more, these retailers were already in trouble. There were barely any growth stocks among the group, plus many famous cases of rising debt burdens and pending bankruptcies, including Macy’s (M), Nordstrom (JWN) and JCPenney (JCP). The worst is not over for retail stocks.
In a similar fashion, you want to avoid additional industries that were completely unable to do business during the pandemic, because now they’re on life support. We won’t have a clear idea of which companies will survive and which will suffer a death blow from the debt involved in staying afloat when no revenue came in to pay their monthly bills. These industries include travel (vacation cruise companies and airlines), large entertainment venues (movie theaters and casinos), restaurants, and the commercial real estate companies that rent to floundering businesses.
The secondary economic problem caused by the business lockdowns that will hit the stock market over the next several years will be massive unemployment. There are tens of millions of Americans out of work. Famous regional and national companies are announcing business closures almost daily. It’s fair to assume that these Americans have bills and mortgages to pay, and that they’ll have difficulty finding good career jobs. (Let’s not pretend that retail clerk and waitstaff jobs bring in enough income to support families. Any family breadwinner with a mortgage needs an annual income in the $50,000-$150,000 range, not a minimum wage job!)
When these workers run out of savings during their job searches, they’ll begin tapping into retirement funds and figuring out how to lower their monthly expenses. Eventually, they will not be able to pay their monthly bills. In that light, you don’t want to be invested in financial companies that loan money to consumers: credit card companies, auto financing companies and banks.
Use Common Sense in Picking Good Stocks Now
Think to yourself, If I ran a household or business that was on a tight budget, what would I pay for and where would I cut the fat? All people and businesses will be affected by the pandemic. Picking good stocks now means investing in the industries that seem necessary to day-to-day family survival and business operations, and avoid industries that seem like luxuries to people and managers who are pinching pennies. Above all, avoid industries that involve large gatherings of people in close quarters, because the fear of contracting a virus will guide many people’s actions for a long time to come.
Learn more about which U.S. companies are thriving during this difficult economy by subscribing to my Cabot Undervalued Stocks Advisor.