Please ensure Javascript is enabled for purposes of website accessibility

Stocks With These 3 Traits Can Thrive Because of Coronavirus

By Brian Stoffel - Updated Mar 11, 2020 at 5:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

And the third trait is the most important for managing adverse situations.

Believe it or not, there are a lot of companies that are about to become much stronger as a result of the novel coronavirus outbreak. And no, I'm not talking about biotechs that could find a cure or companies behind the surge in telecommuting.

If that sounds counter-intuitive, here's an even more interesting tidbit: the stock prices of most of these companies don't reflect this reality. That means you have an opportunity to buy shares now, and -- as long as you're willing to hold for the long-haul -- reap enormous rewards later.

All you have to do is look for companies with these three traits.

microscopic magnification of coronavirus

Image source: Getty Images

Before the list: A quick primer

"Get stronger because of COVID-19? How is that even possible?" 

If that's your reaction, I completely understand. First, let's talk about what "getting stronger" does and doesn't mean.

It does not mean that a company's stock will go up while the world is trying to sort this situation out. It also doesn't mean the company won't suffer via lower sales and profitability. Sorry -- there's no avoiding these things in a recession.

But there's a silver lining: "Getting stronger" does mean that -- relative to the competition -- a company's position in the market will become considerably stronger. When the economy recovers, it will have an opportunity to increase market share considerably.

Want an example?

Consider Whole Foods Market coming out of the Great Recession in 2008-09. Beforehand, the company was the leader in natural/organic foods, but the concept was still nascent. When the Great Recession hit, competition abandoned the trend -- such goods were deemed too expensive.

Whole Foods' stock suffered mightily, falling 75% in 10 months, but the company survived (because it had two of the three traits I'll get to in a second). When the economy started recovering, Whole Foods had the entire natural/organic market to itself. The result: a stock that returned 1,300% over the next four years.

Now on to the traits.

1. Barbell technique

The first of these three traits is that a company needs to practice the barbell technique. While that may sound confusing, it's pretty simple. It requires a company to:

  • Devote roughly 80% of its resources to a line of business that's protected by a wide moat (more on that below), and
  • Devote the other 20% to high-reward ventures that may or may not pan out.

The second bullet point is more important during normal economic conditions, so we should devote our attention to the first. In essence, a moat is a sustainable competitive advantage -- something that makes it hard for other companies to steal a company's business away when it's successful. Moats come in four general varieties:

  1. Network effects: Each additional user of a service makes the service more valuable. The most obvious example of this is Facebook (META -0.76%). What's the point of using it if your friends aren't on it? With each person that joins, the incentive of non-users to join increases.
  2. High switching costs: Sometimes, you become heavily reliant upon a product or service for daily needs. Switching away would either be too costly or too painful. Axon Enterprise (AXON 0.06%) is a case in point: The company stores and analyzes body camera videos for police officers. Imagine the cost and risk of losing evidence associated with leaving Axon.
  3. Low-cost production: If a company can offer the same or better service at a lower cost, it will win more business. Because Amazon (AMZN 3.15%) has such a huge network of fulfillment centers, it can deliver goods in a day for a lower internal cost than anyone in the world.
  4. Intangible assets: This includes patents, brand value, and government-protected industries. If you need some examples, consider pharmaceuticals, Apple (AAPL 1.62%), and utility companies, respectively.

Here's why this matters: When the economy eventually recovers, industry leaders need to defend their turf from competition. Without a moat, they can't do that. Incidentally, this is what led to Whole Foods' slumping stock: There's nothing stopping every grocery store from also offering organic goods. 

2. Skin in the game

The second variable is skin in the game. When the economy turns south and times are tough, it takes vision, fortitude, and grit to continue. Investors want management and employees that are in it for the long-haul. You can look for these traits in three different ways:

  • Role of the founder: A founder often views a company as an existential extension of themselves. They're not going to walk away when things get tough. A simple internet search of a company can tell you how involved a founder is.
  • Insider holdings: If management owns a lot of stock, they have a financial incentive to create lasting value. You can check how much insiders own by looking for the DEF 14 A filing on the SEC's EDGAR database.
  • Glassdoor reviews: Front-line employees need to be happy -- especially when times are tough. Visit Glassdoor.com to see what kind of ratings your investment target gets from its workers.

3. Financial fortitude

Of all three traits, however, none is more important during recessions than financial fortitude. Sure, a company's stock may fall. But if it has lots of cash, little debt, and strong free cash flows, the actual company can weather the storm just fine.

In fact, companies with those three traits can get notably stronger as a result. How?

  • Buying back their own stock at depressed prices.
  • Acquiring smaller competitors at a discount.
  • Lowering their own prices to drive competition into bankruptcy. This hurts the company in the short term but gives them more market share in the long run.

Consider that some of the most well-known names in the world are currently sitting on huge cash piles, including Alphabet (GOOG -0.27%) (GOOGL -0.21%), Apple, Amazon, Microsoft (MSFT 1.07%), Facebook, and Berkshire Hathaway (BRK.A 1.69%) (BRK.B 1.64%). A potential investment doesn't need to be a behemoth like these players. It just needs a lot more cash than debt and reliably positive free cash flows.

Takeaway for investors

I can't stress this enough: Stocks of companies that check off all three traits can still fall. You must be in this for the long-haul.

If you have the patience to see it through, though, investing in companies that practice the barbell technique, have employees with skin in the game, and have financial fortitude can prove incredibly lucrative. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$415,850.00 (1.69%) $6,900.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$277.50 (1.64%) $4.48
Axon Enterprise Stock Quote
Axon Enterprise
AXON
$93.23 (0.06%) $0.06
Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$259.58 (1.07%) $2.75
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,174.75 (-0.21%) $-4.51
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$109.56 (3.15%) $3.35
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$160.03 (-0.76%) $-1.22
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,181.62 (-0.27%) $-5.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.