A deep global recession was unthinkable just a few months ago. Stocks were rising, economies were expanding, and optimism was high.
The novel coronavirus outbreak that originated in China is now spreading globally, and governments are shutting down schools and businesses. As a result, a recession now looks inevitable. U.S. Treasury Secretary Steven Mnuchin reportedly warned some Senators Tuesday that the unemployment rate could surge to 20% due to the pandemic.
When everything's going great, investors care about growth. Earnings growth, sales growth, cash flow growth. Little attention is paid to the balance sheet. Companies aren't rewarded by the stock market for being conservative, keeping debt in check, and piling up cash for a rainy day.
But when that rainy day arrives, like it has now, the balance sheet has its day in the sun. This crisis is going to drive some companies into bankruptcy. That's a given. Companies that have spent the past decade using debt to fuel share buybacks are going to face a day of reckoning.
For investors, the most important thing is to make sure the companies you have in your portfolio are capable of surviving a brutal recession. Here are three that should have no problem.
It's Buffett's time to shine
Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) has been accumulating cash for years as the legendary investor found it increasingly difficult to find suitable deals. Berkshire ended 2019 with more than $120 billion in cash on the balance sheet, far above the $20 billion minimum Buffett insists on.
This cash serves two purposes. First, it provides a massive buffer against deteriorating business results. Berkshire owns a vast collection of businesses, spanning insurance, energy, railroads, and a slew of other industries. A recession will hurt them all to varying degrees, and ultra-low interest rates will put pressure on the insurance operations. But Berkshire has so much cash that the company's survival isn't up for debate.
The mountain of cash also gives Buffett ammunition to make deals as markets are crashing. Buffett made plenty of lucrative moves during the financial crisis, and he'll likely try to do the same during this crisis. Buffett could very well deploy close to $100 billion if he finds the right opportunities.
Berkshire stock is being hit hard by the sell-off, and that will likely continue if the stock market keeps slumping. But Berkshire may be the biggest winner when it's all said and done.
A mountain of cash
Apple (NASDAQ:AAPL) is going to feel quite a bit of pain in the coming quarters. The company's supply chain was turned upside down when the outbreak was confined to China, leading to shortages of key products. Now, with the virus spreading globally, demand for Apple's products could fall off a cliff.
While Apple's revenue and earnings will take huge hits, the company's balance sheet will see it through this crisis. At the end of 2019, Apple had over $200 billion in cash and marketable securities. The company also had a little over $100 billion in debt, giving it a net cash position of roughly $100 billion.
Like Berkshire, that cash will give Apple the opportunity to make acquisitions on the cheap. It also makes it impossible for Apple's results to deteriorate so badly that they jeopardize the survival of the company. It's uncertain what demand for Apple products will look like during and after this crisis. But Apple will still be around to sell pricey gadgets, no matter how bad the situation gets.
A shoe company with staying power
Any company that sells apparel or shoes will likely be hit hard by the coming coronavirus-driven recession. Skechers (NYSE:SKX) will almost certainly sees sales decline, perhaps substantially. The stock is down more than 50% over the past month as investors brace for the worst.
But Skechers is unique because of its balance sheet. At the end of 2019, the company had cash, cash equivalents, and investments totaling $1.03 billion. Total debt was $121 million, leaving a net cash position of more than $900 million.
That's a lot of cash for a company with annual sales just above $5 billion. Skechers has spent some money on share buybacks in recent years, but the company has maintained its fortress balance sheet. That decision is proving prescient as economies shut down and demand tumbles.
Skechers' results are going to get ugly, but the company's balance sheet will enable it to weather this storm.