With so many businesses closing down over the novel coronavirus, there is a lot of talk about a recession. We've seen states shut down nonessential businesses, and plenty of employees are now working from home. Those who aren't so lucky might be out of the workplace and off the job for a while. People are hurting financially.
Considering the traumatic impact that the outbreak is having on travel and consumers' ability to go out, the financial situation for some companies is also getting dire. With that in mind, here are three stocks that I think are particularly susceptible to the pain and are best avoided.
1. AMC Entertainment: No blockbusters this spring
Movie theater earnings are about to get whacked. There is no easy way to put it. It is already evident in the recent box office numbers, which show that people are avoiding movie theaters. The premiere of Daniel Craig's final turn as James Bond has been postponed until the fall, the sequel to A Quiet Place has been delayed, and Harrison Ford's The Call of the Wild is reportedly going to lose millions.
Now we're hearing that states are beginning to force cinemas to close to avoid the spread of the COVID-19. Couple in the availability of streaming television and this is a cocktail for disaster for movie theater chains.
One of the harder-hit securities since the beginning of the sell-off, AMC Entertainment Holdings (AMC 3.74%), is down more than 60% over the past month. The company owns more than 900 movie theaters, with roughly 73% of those in the United States and the other 27% in Europe.
Prior to this turmoil, AMC has had up-and-down financials on an annual basis. 2019 ended with a net loss of $149.1 million, or $1.44 per diluted share. On an adjusted basis, the full-year losses were $112.1 million. Revenue has been stagnant since 2018, growing a mere 0.2% in 2019. Collectively, the uneven nature of AMC's financials has culminated in a loss of $2.64 per diluted share over the last five years. The company's long-term debt has also skyrocketed from $2 billion in 2015 to $9.7 billion in 2019.
After the sell-off, the stock does offer value against the assets on the balance sheet. AMC finished 2019 with $1.2 billion in total equity, while the stock's total market capitalization is a mere $258.5 million. Ordinarily, I love this type of value play on the assets. Unfortunately, in this instance, I think the shares are discounted for a reason.
The company announced on Tuesday that it will be closing all U.S. theaters for six to 12 weeks. Theaters are already struggling against the rising tide of streaming and online feature films like Netflix's The Irishman. This 12-week block is going to really put a damper on the company's first quarter.
Universal announced that it will release many of its current theater offerings online to rent through the weekend. Should the move prove highly profitable, studios might be inclined to release films simultaneously online more often -- a dangerous thought for AMC Entertainment.
It does have an online on-demand service, and it will at least help during this challenging time. Nonetheless, all those empty theaters are going to put a hurt on this business. I think the stock should be avoided, at least until the coronavirus issue has settled a bit.
2. Penn National Gaming: Nothing to gamble on
I do own shares of Penn National Gaming (PENN 2.10%). Clearly, I bought it a little early, but hindsight is 20/20. With so many sports leagues suspending play, the sportsbooks will have little value. And now the Kentucky Derby has been postponed. Combined with the closure of various gaming locations that Penn National owns, the company's prospects for this year seem a little bleak.
Long term, I think Penn National has potential with the rising tide of sports betting. Overall revenue has been on a steady rise through the past five years, gaining nearly 14% in fiscal 2018 to $3.6 billion. Variations in annual expenses have caused overall net income to be a bit up and down, but the company has been very profitable. Its investment in 36% of Barstool Sports has gained it access to one of the best marketing assets there is right now, with 66 million monthly visitors to the website. I like the company!
But the coronavirus had to come around and mess everything up. It seems unlikely that the Pennsylvania-based gambling chain will be able to continue its growth story in the first half of the year. It has announced suspended operations at a multitude of locations across the country, like Ohio, Illinois, and Pennsylvania, to name a few.
The downtime could cost Penn National a great deal of money. It's a sad turn for investors when you consider the stock was pushing toward $40 a share not that long ago and closed Monday at $7.33. The situation is so serious that casinos are asking for emergency financial aid from the government. Until it's a little clearer how long this shutdown is going to last, gambling stocks are going to have a hard time finding momentum.
J.C. Penney: Tough to shop
Social distancing could not have come at a worse time for brick-and-mortar retail. In particular, J.C. Penney (JCPN.Q) stands to suffer.
Penney has been grasping to find growth for a long time. The retailer suffered declining sales before the coronavirus outbreak ramped up. Now, with the quarantines and general shuttering of nonessential businesses, it has been hit with a whole new punch.
Comparable-store sales declined by 7.7% in 2019, with adjusted declines of 5.6%. In all, total revenue was down 7.1% to $11.2 billion. The operating benefit of that revenue was relatively flat with a loss of $8 million. Interest expenses of $293 million helped bring the retailer's full-year net loss to $268 million. That's 5.1% worse than 2018's net loss of $255 million.
It was getting hard to back J.C. Penney long before the coronavirus.
The company is bringing its Style on the Go program to 50 locations, which could help when shoppers aren't going into stores. You can order items online and pick them up curbside. Still, it's hard to see the retailer getting a big change from it. Penney has tried for years to shift its sales story, and it just hasn't happened.
Depending on the length and severity of this outbreak, Penney could really be in trouble. Historically, the retailer's profits come from the fourth quarter, with general losses throughout the rest of the year. The coronavirus can only speed up the decline of this ailing business.
The stock is down 27.6% over a month's time. The company's book value is roughly $2.58 per share, so the $0.51 per share that the stock is trading at is a significant discount to the business. Ordinarily, I'd love this kind of value for a stock. In this case, I think Penney shares are a real value trap. The business continues to slowly die, and this kind of sales environment will only make things worse. Traders might play the game, but long-term investors, be wary.