lundi 16 mars 2020

What looks like a crazy bargain right now

Everybody was laughing about coronavirus about 2 weeks ago. Me included.

Now, it looks like 2008 part II.

Of course, current and forward PE ratios may be completely wrong. With all the stores that close, the earnings of many companies will look like apocalypse next quarter (in Quebec, schools are closed for at least 2 weeks, every bar and pub is closed, pools, libraries, arenas...) I now believe that this crisis will last for many months (Alberta just closed it's schools until september, which surely means that the situation is critical).

However, most of us will survive. So, for those who will survive long enough to follow the stock market in the coming years, here's some crazy bargains that you could purchase on march 16th, 2020. Let's take another look at that list in 1 or 2 years:

MTY Food Group:

Forward PE ratio: 6,5
Price to book value: 0,9

Mohawk Industries:

Forward PE ratio: 7,6
Price to book value: 0,75

Forward PE ratio: 10
Price to book value: 2,4

Forward PE ratio: 10
Price to book value: 1,1

Booking Holdings:
Forward PE ratio: 11
Price to book value: 9

Forward PE ratio: 14
Price to book value: 4

Forward PE ratio: 16
Price to book value: 1,9

Berkshire Hathaway
Forward PE ratio: 16
Price to book value: 1

Forward PE ratio: 17
Price to book value: 3,7

Some of these names will be impacted a lot by the coronavirus crisis (MTY, Disney, Booking Holdings). However, some others like Facebook, Google and Berkshire Hathaway may not be as much impacted by it. And these last 3 stocks have a lot of money and have a gigantic moat. So, they may be a great place to put your money. Because a lot of companies will be affected by the crisis.

Many will suffer a lot. Some other will simply disappear.

My recommendation: look for something really solid.

9 commentaires:

  1. the PE's need to be considered against interest rates. And they just went to zero. When the "E" returns, and it will, interest rates will not go back up, they will stay low. So you will get multiple expansion. The result is that your FB as one example, selling today at $146, will likely in 2025 or 5 years from now be $700. Or looking at an index, i'm suggesting the DJ-30 in the US will likely triple in 5 years, from 20k today to 60k. What's really risky in this scenario is CASH. it gets inflated away.

  2. Is now really the time to buy, with nearly everything shut down, and most people not working or spending.

  3. For me, yes, absolutey 100%. The time to buy is most days in your lifetime. Times like these are gifts because prices have crashed on uncertainty, when the issue is a fully recoverable one.

  4. Fully agree with everything that is being said here…I myself cannot buy as I was already all in but I haven’t sold anything either and I will continue to hold…I think the important thing to focus on is the ‘intrinsic value’ of the stocks in your portfolio…There’s no future in holding cash with the risk free rate well under one percent…

    There was a great book written in 1989 called ‘The Speculator’s Edge’…it was mostly about the futures market but has definite applications to the stock market…It’s key message was to ‘demand supply and supply demand’ therefore realizing the function of the speculator in the futures market…In this way he serves a needed function in the economic activity of whatever market he is participating in…

    In other words now is the time ‘to demand supply’…

  5. For MTY it is very tricky to predict: If the crisis last long, a lot of franchisees may get bankrupt and after that the revenues of MTY will be destroyed and the debt will remain the same!

    1. Yes. And when a stock drops that much, it's usually for a good reason.

  6. At the end of 2019, MTY had about 51M in cash. Their operating expenses were 404M (wages 108M; cost of good sold + rent 64M [not sure how much was just rent]) and long-term debt interest of 18M. This does not leave a lot of wiggle room. Unless they can lay off a lot of staff, they might have about 1.5 to 3 months of burning time to sustain their business. Their long-term debt was already 541M (about 3.7x debt to 2019 EBITDA which will be a lot lower in 2020) so I am also not sure how much more they would be able to lever up to prolong the burn time. If we conservatively halve EBITDA for 2020, the existing debt leverage will jump to over 7x which is quite dangerous and will thus command higher borrowing costs, especially if they would like to borrow even more while at the same time experiencing shrinking franchise network and same-store-sales. There are also almost no hard assets they could put down as collateral. Hopefully, there will not be any national public health restaurant closures and people will still go out to eat at least in some provinces/states to help bridge the costs while we wait what will happen next.

    Buying Papa Murphy has put MTY in a very difficult situation. I am not sure whether it was a very smart decision. I never eat out so I am not a good reference, but I personally do not understand the concept of an unbaked premium pizza with an Irish-Italian brand. Why would anyone want to buy it or eat it? I always thought that the super hot owen and great dough were the special part about having a pizza from a pizzeria. Papa Murphy's concept guarantees dough will probably not be very good. Moreover, buying an unbaked pizza also eliminates the convenience of a regular baked pizza. If for some reason you wanted steaming hot pizza because delivery pizza was just too cold for you, wouldn't it be a lot more convenient just to reheated quickly on broil a proper baked pizza rather than cooking an unbaked pre-made pizza? I do not understand who the target customer is. Have any of you tried / are steady buyers of Pappa Murphy's pizza?

    I have to wait for my next next paycheque in mid April before making any investments unless I can collect about 2% of portfolio value that I still hold as outstanding accounts receivable. I am a little hesitant to buy more MTY though because the damage from the pandemic will be permanent (lost sales for maybe the next 3+ months are gone forever) and revenues will likely be subdued even after the pandemic will be over (people will be still panicking and after such long time will be habituated not to eat out as much in public - especially in restaurants with lots of Asian customers/staff). Hopefully during the transition period everyone will be drinkin lots of juice to get their vitamins and Lassonde will have stronger than usual results. In a few months, I could then sell Lassonde at a large loss to average down into even more beat-up MTY (maybe in spring or summer). If MTY would stay beat-up for too long, I think someone like Fairfax or some pension fund will take them out and merge them with their existing restaurant holdings, perhaps after some extra financial injection. This fall will be a prime time for consolidating the restaurant and other small customer service companies since many will be going bankrupt after the mom-and-pop operators will burn through all their savings and available lines of credit. Too bad MTY will be too levered to take advantage of this situation.

    Are any of you buying MTY right now? If yes, why? If not, why not and what would change your mind to pull the trigger?

  7. with all the beautiful, enduring, highest quality businesses on fire sale right now, why on earth would anyone buy MTY Foods right now? In Canada, buy CN Rail, there is 40% upside just to fair value and you can sleep at night in the interim. In the US, buy Microsoft or Pepsi for an easy layup with manageable downside.

  8. I jumped in on high ROE software companies as I feel they overcorrected and carry low debt overall as a sector.