I don't know about you, but when I go shopping at the mall, I always look forward to quality merchandise being offered at a good discount.
The same principle should also apply when searching for great companies to purchase in the stock market. Though markets have been swooning in the past three weeks due to the COVID-19 virus outbreak, with the Dow Jones Industrial Average (^DJI -0.20%) experiencing its worst point decline in history, investors should remain disciplined and not engage in indiscriminate purchases.
Even though many stocks may seem like bargains today, it's important to sift out the wheat from the chaff. During periods of severe market dislocations such as the ones we have witnessed in the past fortnight, it's easy for investors to fall into the trap of "buying anything cheap". While that may seem like a wise strategy, you'll probably end up with a bunch of mediocre companies in your portfolio. Quality matters, especially during an economic downturn.
Here are two bargain stocks you can buy today. Investors should take note, however, that an economic crisis may be hitting us soon. These stocks may perform poorly in the short-term, but should do just fine once the storm clears.
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Royal Caribbean Cruises
Royal Caribbean Cruises (RCL) is a global cruise vacation company that operates cruise liners. It has four global brands and 61 ships, with another 17 on order as of Dec. 31, 2019.
With the coronavirus outbreak in January this year, Royal Caribbean has already cancelled numerous cruises. Last week, the company implemented a "Cruise with Confidence" policy that allows guests to cancel up to 48 hours before sailing, along with a full credit on their fare for use on any future sailing in 2020 or 2021 . The policy applies to both new and existing cruises.
Though this measure was implemented to assure customers and hold up confidence, it will undoubtedly have a significant top and bottom-line impact on Royal Caribbean in the near-term. President Donald Trump also announced significant travel restrictions from Europe to the U.S. for the next 30 days to control the spread of the virus , and this sudden announcement has further knocked down the stock price of the company to bargain-basement levels.
The company has also just announced a 30-day suspension for US sailings due to the "gravity of the public health crisis," further exacerbating its short-term pain. Services are expected to resume April 11.
Royal Caribbean's shares have declined by a whopping 77.5% since the start of the year, and are trading at just 3.4 times historical earnings. Though the company will take a massive hit this year due to the cancellations, the stock looks too cheap to ignore if you consider the medium-term prospects.
As of Dec. 31, the company had about $2.6 billion of debt due within a year, consisting of $1.2 billion of finance leases and $1.4 billion of commercial paper. Liquidity consisted of $1.5 billion, made up of $243.7 million in cash and $1.3 billion under unsecured credit facilities . The company has also just announced that it has increased its revolving credit capacity by $550 million, and has also reduced capital expenditures and operating expenses to improve liquidity by a further $1.7 billion this year.
These actions add up to total short-term liquidity of around $3.75 billion, which is more than sufficient to cover the company's short-term liabilities. As for customer deposits of $3.4 billion, the company can allow customers to defer travel to later dates rather than refunding the bulk of these deposits, thus allowing it more breathing room in terms of cash flow. Royal Caribbean's long-term debt of $8.4 billion has maturities ranging from 2021 through to 2030, and is well-spaced out . Because of the 30-day suspension, the company's cash burn rate should be close to $200 million for the month, but this is still manageable due to the liquidity cushion as mentioned above.
After the Covid-19 crisis subsides, people may still be hesitant to go on cruises. The company may, therefore, need to ramp up spending and marketing to get people comfortable again, as well as institute new practices and policies assuring guests that they will be safe on board. These may involve additional operating costs for the company, but should, in the longer-term, be covered by rising revenues as confidence returns with cruises.
I believe there is pent-up demand for cruises even though Covid-19 has dealt a stunning blow to the industry. Cruises still offer an idyllic leisure experience and a chance to wind down, away from the hustle and bustle of the big city. This fact should offer investors comfort that the company will still be around to provide guests with great holiday experiences.
Tapestry
Tapestry (TPR 1.20%) is a global brand powerhouse that manages a range of luxury brands such as Coach, Kate Spade, and Stuart Weitzman. The company's brands hold a wide range of products including luxury handbags, shoes, and apparel.
With travel restrictions being announced by many countries due to COVID-19, retail outlets operated by Tapestry will feel the heat. The company has 1,540 stores as of the fiscal year 2019 and a strong brand presence across many continents. This should provide some buffer from the short-term impact of these draconian measures.
Tapestry also recently announced a multi-year growth plan led by newly appointed CEO Jide Zeitlin . He has conducted an in-depth review of the brands and businesses within the company, and is poised to take it to the next level.
Tapestry's stock is down 57% year to date, and is only trading at about 6 times trailing earnings. This makes it a bargain in my books, as the accumulated goodwill of Tapestry's three luxury brands should stand it in good stead for a swift recovery post-crisis.
