The novel coronavirus outbreak has sent shockwaves through financial markets around the world. The contagion is threatening to end the 11-year-old bull market, and it has made the U.S stock market more volatile than it's been since the financial crisis. Nearly every day since Feb. 21 we have seen violent swings of several percentage points in the S&P 500 and other market indices.
Stocks are down broadly since the coronavirus (which causes the disease COVID-19) began spreading outside of China, with the S&P 500 off 14%, and a number of stocks have plunged on the news, notably oil producers and travel-related stocks, which have been directly affected by the outbreak. But several stocks look oversold on the market panic, and two of them, Dave & Buster's (PLAY 4.45%) and Children's Place (PLCE +10.28%) could be primed for big comebacks over the long term. Let's take a closer look.
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An exaggerated sell-off
As you can see from the chart below, both stocks have fallen sharply during the coronavirus crash.
The companies compete in different sectors, but investors believe both are vulnerable to the coronavirus for different reasons. In the case of Children's Place, whose shares are down nearly 40%, investors have punished weaker apparel retailers during the recent crash -- they seem to believe that Americans will delay discretionary purchases as they focus on buying necessities in case they need to stay at home, and that supply chain issues with imports from China will continue.
Like other retailers, Children's Place depends somewhat on China for sourcing, but only 19% of its product comes from that country, meaning the retailer should be able to manage a delay in product coming from China if it has to. The company has also built a healthy e-commerce business, with about 30% of its sales coming from the online channel.
Dave & Buster's shares, meanwhile, have fallen by more than 50% since Feb. 21, on par with drops that cruise line stocks like Carnival and Royal Caribbean have experienced. The eat-and-play chain, however, has much less exposure to the outbreak than the cruise industry does. Dave & Buster's is not a travel stock, and therefore doesn't carry the same risk as companies like cruise lines. Though it may be affected if people choose to avoid gathering places, the restaurant-and-arcade chain shouldn't see as steep a drop in business as travel-related companies are seeing. Ten percent of its business is related to special events, which may be most vulnerable, but the stock looks oversold at half the price it was just a few weeks ago.
A hidden opportunity
When famed investor Warren Buffett owned shares of IBM, he told investors that they should hope for the tech stock's price to languish so it could buy back more of its stock. Such is the case with Dave & Buster's and Children's Place. Both stocks have been aggressive with share buybacks recently and now looks like an especially rewarding time for repurchases. Over the last four quarters, Dave & Buster's has reduced its shares outstanding by 21%, while Children's Place has cut its share count by 6%. Additionally, activist investor KKR recently took a 12% stake in Dave & Buster's and is likely to push for it to accelerate share buybacks given its rock-bottom price.
Both Dave & Buster's and Children's Place are solidly profitable and are trading at P/E valuations of 8 and 9, respectively, after the recent sell-off. Children's Place's valuation should be even lower, as the company's trailing earnings have been temporarily deflated over the past year due to the liquidation of its rival Gymboree.
Both companies were facing their own challenges before the coronavirus outbreak hit, but they are stable and profitable enough to survive the outbreak or even a related recession. These stocks should eventually bounce back, especially if they capitalize on the sell-off by repurchasing their stock.
D&B and Children's Place are also set to report earnings over the coming weeks, which could give them a chance to recover some of their recent losses. If management can assure investors that the novel coronavirus impact is not as bad as they fear, these stock should start moving in the right direction again.
