Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
I remain somewhat skeptical about “COVID-19 will change the economic and investing landscape forever” forecasts, but Goldman Sachs strategist Steve Strongin is taking the other side,
“[The pandemic] is an existential event where capital needs to find new homes and where yesterday’s strategies will work only by accident the way the stopped clock sometimes tells the right time … The phases of investing for the post-COVID-19 economy will fall into three overlapping periods: preservation, consolidation and innovation. Preservation is the period where uncertainty is so high that the best thing you can do is preserve what you have to see if it provides a useful base for tomorrow … [During consolidation] the companies whose business models fit the moment and are able to demonstrate that they can in fact perform well in a post-COVID-19 world begin to pull away from the rest … [During the innovation stage] with change already underway, the normal costs of change are lower, thus making disruption easier. This creates the potential for massive disruption and superior investment returns, which should attract significant capital.”
“@SBarlow_ROB GS: The 3 phases investors will have to navigate after COVID-19” – (research excerpt) Twitter
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The most interesting research report I read Wednesday, by far, was from Credit Suisse – “ Why most COVID-related corporate restructurings will likely fail (and spotting those that might succeed).”.
Analyst Michel Lerner detailed the rise of zombie companies – those with cash flow-related return on investment lower than the cost of capital. He provided historical context showing that few of these companies will be able to successfully restructure their businesses but also included a list of potential restructuring winners.
The global companies Mr. Lerner believes have the highest probability of reorganizing include (in order) Dassault Aviation SA, Neurocrine Biosciences Inc., Norfolk Southern, AT&T Inc. , Martin Marietta Materials Inc., CF Industries Holdings Inc. and Palo Alto Networks Inc.
“@SBarlow_ROB This CS report was really interesting. "Stocks with a credible restructuring story (improving CFROI to above cost of capital levels pre-crisis, reasonable Debt levels and where Momentum is not overly negative)' “ – (table) Twitter
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The Financial Times reported that prominent hedge funds are betting against the continuation of the current equity market rally,
“'The markets are priced to perfection,' said Danny Yong, founding partner at hedge fund Dymon Asia Capital in Singapore. ‘The stability in equity markets does not reflect the job losses and the insolvencies ahead of us globally … ‘I believe we will see new lows in global equity markets later this year,’ he added” … Paul Singer’s Elliott Management, which has $40bn in assets, wrote in its most recent letter to investors that since the impact of the economic downturn is greater than that of the 2008 financial crisis, “our gut tells us that a 50 per cent or deeper decline from the February top might be the ultimate path of global stock markets”.
“Hedge funds brace for second stock market plunge” – Financial Times (paywall)
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Newsletter: “Why major U.S. brands may no longer be good investments” – Globe Investor
Diversion: “Lost Monument of Early Maya Civilization Discovered in Mexico” – Gizmodo
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Scott Barlow