Previous economic crises have disrupted cash flows but never before has a crisis disrupted entire business models to the extent COVID-19 has.
Fund manager Naos Asset Management said in an investor webinar this morning it was looking for companies that would survive through the crisis.
“We’ve seen previous crises like 1987 and 2008 but they are not comparable — we need to go back to 1918,” Naos portfolio manager Robert Millar said, referring to the Spanish flu pandemic.
Legendary investor Warren Buffet once said investors should only buy something they’d be happy to hold if the market shut down for 10 years.
Millar and Naos’ chief investment officer Sebastian Evans directly quoted Buffet and reiterated this advice in their own words.
“Look for an industry that will be there regardless. When you look at hospitals for instance that’s a given – it’s going to happen. That’s where we’re looking for investments,” Evans said.
The resilient and not so resilient
But it’s not just about physical presence, it’s also the ability to generate cash flows. One stock Evans pointed to was telecommunications play MNF Group (ASX:MNF).
MNF provides telecommunications technology underpinning the voice, video, messaging and telco capabilities in everyday apps that people are using to work remotely.
Evans said MNF’s management told him in a recent conversation that they believed network usage was up 80 per cent in recent times. MNF’s share price is up more than 50 per cent in the last fortnight.
Another stock Naos likes is Cochlear (ASX:COH), a well-known large cap healthcare play that makes hearing devices. Indicating the investor interest in the company, it recently raised $800m in an oversubscribed capital raising, but according to Naos, Cochlear received investor bids amounting to about $6bn.
“These are in high demand, they will survive,” Evans said.
On the flip side, Evans isn’t that keen on the tech sector, which he thinks hasn’t proved itself in a recession.
“They [tech stocks] talk about their recurring revenue, we’ll see how recurring that really is,” he said.
Even big firms will feel flow-on effects
Evans is also not keen on the financial sector, not even the big four banks, which are traditionally reliable in paying dividends.
“If big four banks are delaying dividends, that gives you an idea of how they are going in terms of bad debts and funding challenges,” he said.
“You’re not allowed to chase them [debtors] hard for money now let alone take legal action, so it puts businesses in a bind.”
Evans also named the travel and marketing sectors as ones that have been particularly hard hit.
“Consider Flight Centre (ASX:FLT), they have cut expenses $240m to $60m per month. Clearly marketing and PR activities will be under threat,” he said.
Equities will be popular but small caps may lag
Evans thinks record low interest rates and potentially stagnant or depressed housing prices will cause more people to turn to the equity markets for a return.
However, small caps may be slower to come out of the bear market than large caps due to a lack of liquidity.
“We may see the whole market up 10-15 per cent and small caps not move at all. But we can see the index rising over the long term.”
Evans also reckons some fund managers might bail out of the small and micro cap space.
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