What To Stock Up On For Coronavirus
Summary
- CDC's Dr. Nancy Messonnier has recommended people stock up on food, medication and other necessities in preparation for coronavirus.
- Target and Kroger have limited number of coronavirus-related items each customer can purchase.
- I analyze how related stocks have reacted in comparison to the general market to identify stocks to buy. AMZN and CVS stand out.
On a day when the Dow Jones slid more than 2,000 points, Dr. Nancy Messonnier, the M.D., Director, National Center for Immunization and Respiratory Diseases, came out with recommendations that only added to the fear. Ignoring the pun in the title of this article, her advice was that people in risk groups stock up on food and medication. I look at what to stock up on for coronavirus.
Credit: Simon Klinger
How to prepare for the Coronavirus
Dr Messonnier's advice answered what items to stock up on for coronavirus. As well as foodstuffs, she included routine medication for blood pressure and diabetes as well as over-the-counter medicines and medical supplies to treat fever and other symptoms. Her words were well heeded, with Kroger (KR) and Target (TGT) announcing limitations on coronavirus-related items each customer can buy. These announcements reflect real consumer and inventory pressures that these stores have felt. If there has been any doubt as to whether their first-quarter sales would be impacted, this gives a clear answer. Items on their list included hand sanitizer, disinfectant wipes and cold- and flu-related products.
I identified six stocks that would likely experience increased revenues as a result of this phenomenon:
- The Kroger Co. (KR)
- Target Corporation (TGT)
- Walmart Inc. (WMT)
- Amazon.com, Inc. (AMZN)
- Costco Wholesale Corporation (COST)
- CVS Health Corporation (CVS)
Best Stocks for 2020?
I first compared the ratings of these stocks using Seeking Alpha Premium stock comparison tool. This gives a snapshot of of how Seeking Alpha contributors, sell-side analysts and Seeking Alpha's Quant rating algorithm grade the stock.
Source: Seeking Alpha Premium
CVS and AMZN are standout stocks here. I next looked at valuation metrics against historical valuation metrics. As discussed elsewhere, my favored valuation metric is EV/EBITDA.
Source: Seeking Alpha Premium, Alon Zieve analysis
Amazon is clearly a very different stock to the others listed here, and therefore I've excluded it from the heat map on valuation metrics. Amazon commands a much higher EV/EBITDA ratio as it leads the online sector, which is a runaway growth sector for the industry. This is reflected in Amazon's y/y 20% growth rate, compared with an average of 3.5% for the other stocks, excluding CVS. CVS has an outstanding 32% y/y growth rate.
Perhaps surprisingly, in spite of their aggressive growth rates - which would increase upward pressure on the stock price - the EV/EBITDA (FWD) ratio as compared with their five-year average is attractive for both AMZN at 80% and for CVS, which holds on par. The other stocks have EV/EBITDA ratios of above their five-year average, which is surprising given the fall in the markets. KR, TGT, WMT and COST all look expensive.
Data by YCharts
Both Amazon and CVS have fallen slightly less than SPY has done since the coronavirus selloff began Feb. 19. This cannot be said for Walmart or Costco, which have pretty much held their value whilst the rest of the market has fallen almost 20%.
Data by YCharts
Whilst coronavirus will likely give stocks like Walmart and Costco a first-quarter earnings boost, the real question is whether the coronavirus will impact any long-term secular buying habits. The likely answer is no, and therefore the impact in stock valuation should be very limited. This impact should be equal to the additional cash per share generated by these companies in the first quarter.
As is evident from the analysis above, a 20% increase in cash generation for just one quarter warrants an increase in share price of under 1% for any of these stocks.
One interesting question is whether the markets will react to a first-quarter beat, creating at least a temporary spike in any of these stocks.
It remains to be seen whether there will be supply chain disruption during this year, which will negatively impact sales. Once again, unless these are long-term changes to the supply chain, the impact on the long-term prospects of these stocks is limited by the same logic and analysis above.
The only potential change in secular buying habits may be to accelerate the shift to online purchases and deliveries. If so, Amazon stands to gain even more.
In conclusion, COST and WMT in particular have little been effected by the coronavirus crash. They both currently look expensive compared with their five-year average EV/EBITDA valuation metrics. Amazon and CVS however have both fallen almost in line with the market and currently look cheap in comparison to their five-year average EV/EBITDA valuation metrics. Both have impressive y/y growth metrics.
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This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMZN, CVS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (38)
Did you read it at all??
This being said, I am long CVS. Cheers !
We have had a lot worse things and did very well just be Smart and for god sake stop listening to CNN they are only good at sports
They are the Worst!!!! OMG CNN is against America !!
