I think most investors will agree that it's hard to pin down the "right" time to buy stocks. The problem with holding back when markets are hitting new highs is that this trend can continue for a long time into the foreseeable future, as long as there is nothing to derail the economic expansion. Waiting for a crash in order to buy is akin to timing the market, and we all know that it's an almost impossible task.
However, there are certain events that crop up now and again that help to throw up bargains and compelling opportunities. One of the more recent ones involves a new virus called COVID-19. This new bug appeared toward the end of 2019 in China and, to date, has infected more than 66,000 people and killed more than 1,500. Markets have been in a tizzy over the economic impact wrought by the virus, as countries close their borders to Chinese nationals and China itself orders the shutting down of malls, factories, and food and beverage outlets.
With China's growing prominence in the world due to strong consumer spending and outbound tourism, there's no doubt that COVID-19 will dent overall growth and lead to economic losses for many businesses. Here are three stocks that may offer good value for investors as their businesses suffer temporary disruption from this outbreak.
Royal Caribbean Cruises
Royal Caribbean Cruises (NYSE:RCL) is the world's second-largest cruise line operator and operates a combined total of 61 ships along with joint venture partners TUI Cruises and Pullmantur Cruceros. Earlier this month, news outlets reported that dozens of people had caught the COVID-19 virus onboard a cruise ship, Diamond Princess, owned by Royal Caribbean.
Though Royal Caribbean had just reported a record year of results for the fiscal year 2019, it did caution in its news release that it had canceled eight cruises out of China ending March 4, and modified certain itineraries in the region, all of which would impact earnings per share by $0.25 (note: earnings per share for FY 2019 was $8.95). Nearly 10 days later, however, the cruise company had canceled 18 cruises in Southeast Asia and warned that earnings may take a bigger hit of $0.65 per share for FY 2020.
If the company were to cancel all its remaining cruises for Asia through the end of April, there would be an additional hit of $0.55 to its earnings per share, bringing the total negative impact to $1.20, or almost 13.4% of FY 2019's earnings. Royal Caribbean's stock price has also tumbled from a high of $135 on Jan. 17, 2020, to the current $113.
Investors need to remember, though, that the effects of the virus are expected to be short-term, and only affect the company's cruises up till the end of April. Even looking just at 2020, there'll hopefully be eight more months after April for the company to get back on track and recover from this outbreak.
The Walt Disney Company
Disney (NYSE:DIS) is another victim of the chaos brought about by the virus outbreak. The theme park operator announced the temporary closure of its Shanghai Disneyland theme park on Jan. 25, 2020, and the closure of its Hong Kong Disneyland took place the following day. As of the date of writing, there is still no official confirmation on when the theme parks will reopen, as the COVID-19 situation remains fluid, dynamic, and uncertain.
Disney had also planned to release its live-action remake of Mulan (it was first released as a cartoon in 1998) in North America on March 27. This film is expected to do very well in China but its release is now thrown into uncertainty due to the virus. The outbreak has led to closures of not just malls, but cinemas as well, as part of the government's quarantine efforts. It's unfortunate that a movie seemingly made for the Chinese market had to hit such a huge stumbling block.
The theme parks are grouped under the parks, experiences, and products segment within Disney's financials. For FY 2019 (year ended Sept. 30, 2019), this division made up 37.7% of revenue and 45.5% of operating income, so the hit from these closures could be fairly material.
Disney's financials will be taking a one-off hit for this year, but the effects from the virus should not linger for longer than that, and investors can expect operations to get back to normal after this difficult period.
McDonald's (NYSE:MCD) managed to report a decent set of earnings for the fiscal year 2019. Though revenue was flat year over year due to the increase in revenue from franchised restaurants being offset by sales from the company's directly owned outlets, operating income managed to inch up 3% year over year while earnings per share rose 5% year over year. Free cash flow for FY 2019 was even stronger than FY 2018 at $5.7 billion compared to $4.2 billion a year ago.
In late January, McDonald's announced that it had suspended business in five major cities in China due to the outbreak of COVID-19. The cities were Wuhan, Ezhou, Huanggang, Qianjiang, and Xiantao, and there was no word as to when these outlets could reopen. However, CEO Chris Kempczinski assured investors in the latest conference call that around 3,000 restaurants remained open in China, and that even though China represented 9% of restaurant count globally, it only accounted for 4% to 5% of sales and just 3% of operating income.
Buying on temporary troubles
The COVID-19 outbreak provides the perfect opportunity for a savvy investor to swoop in to buy the stocks of these three companies that have been negatively impacted by closures and cancellations. As the Chinese government grapples with the daunting task of containing the spread of the virus, these troubles could continue to bring adverse news to investors' ears, further depressing valuations amid rampant pessimism.
These companies have proven that they have a strong brand franchise and solid fundamentals. This is, therefore, a great opportunity for investors to load up on the stocks while they have been beaten down.