What happened
Shares of high-priced consumer-facing stocks like Wayfair (W +2.46%), Planet Fitness (PLNT 1.93%), and Freshpet (FRPT 3.31%) were all tanking today as the broad market plunged over fears around the expanding coronavirus outbreak.
An Oval Office address from President Trump last night did little to stabilize markets, and he also announced a 30-day suspension of most travel from Europe, which sent markets plunging across the pond this morning. At the same time, the NBA suspended its season after a player tested positive. A number of colleges sent students home, mandating classes be online, while businesses across the country instituted similar work-from-home policies. A brief recovery in the afternoon after the Federal Reserve said it would inject $500 billion into banks quickly faded.
Investors continued to flee consumer-facing stocks like the trio above. As of 2:32 p.m. EDT on Thursday, Wayfair stock was down 20%, while Planet Fitness had lost 12.6%, and Freshpet had fallen 15%. The S&P 500 was down 8% at that time.
Image source: Getty Images.
So what
Consumer-facing stocks, especially those in the discretionary sector, have generally plummeted since coronavirus fears first rippled through the market a few weeks ago. Investors believe that this sector is one of the most at-risk in a sustained outbreak or a recession, if one happens. Already, Americans have begun to cancel travel plans and restaurant reservations, and are generally avoiding gathering places. The effect of those decisions could spread through the economy, slowing growth and even leading to a recession.
The stocks above are all sensitive to varying degrees to such an economic shock.
Wayfair appears to be the most vulnerable. Shares of the online furniture seller have fallen 56% since Feb. 21, when the sell-off began. Even at that time, Wayfair was down by about half from its 52-week high as investors grew skeptical over slowing top-line growth and a decision to lay off hundreds of tech employees to help move the company closer to profitability.
Recessions are almost always more problematic for money-losing companies like Wayfair that rely on debt funding, secondary offerings, and stock-based compensation to fuel their growth. Wayfair's balance sheet is solid, but a recession would likely dent top-line growth further as the company would be sensitive to a slowdown in the housing market, and it relies on bigger-ticket, home-improvement purchases.
Planet Fitness shares have also been battered by the recent crash, as investors believe that Americans will avoid gathering places like gyms. That may be true, but Planet Fitness isn't as vulnerable to an outbreak as it might seem. Most of its gyms are franchised, which limits its exposure to the performance of the individual locations, and the company uses a membership model so current members are likely to continue paying even if it means not going to the gym for a month or two. Finally, as a discount gym with memberships at just $10 a month, Planet Fitness should be able to weather a recession relatively well.
Freshpet, the maker of natural pet foods, also seems like it should hold up well through an outbreak and a recession. Pet products tend to be recession-proof, as consumers have to feed Fido in good markets or bad. Freshpet shares have racked up monster returns in recent years, so investors may now believe they're overpriced as the economic winds shift. Many of its products are also refrigerated, meaning that they can't be purchased online. If consumers no longer want to visit stores, that could hurt sales. Finally, its products also tend to cost more than dry food like kibble, so some pet owners could trade down to a cheaper product in a recession.
Now what
As more events and daily activities across the U.S. get canceled or shut down, the risk of the economy drastically slowing increases, meaning these stocks could see further effects from the coronavirus outbreak. The market crash is only a few weeks old and no one knows how long or severe the epidemic will be, nor do they know how big of an economic shock it will create.
As these stocks fall, some of them are beginning to look like bargains, but investors should be aware that they could still have further to drop before they begin to recover.
