Whether you're a working American, an investor, or both, the past couple of weeks have been nothing short of frightening. Coronavirus disease 2019 (COVID-19) has gone from an illness that was sparsely popping up in select countries and U.S. states as recently as five weeks ago to an all-out pandemic -- and it's left workers and investors to wonder whether or not someone got the license plate of the Mack truck that hit them.
With mitigation measures in place that are designed to curb the spread of COVID-19, the intention of regulators is to keep our healthcare system from becoming overwhelmed. But there's a price to pay for suppressing this novel coronavirus, and it's being felt in the pocketbooks and portfolios of most Americans. In fact, it has people talking about the real possibility of a recession on the immediate horizon.
According to Treasury Secretary Steven Mnuchin, who spoke with Republican senators earlier this week, without a considerable fiscal stimulus package from the federal government, unemployment in the U.S. could rise from a 50-year low of around 3.5% to Depression Era levels of 20%. It's almost unfathomable to think about and shows just how important it is for Congress and President Trump to act quickly to ensure the financial well-being of businesses and working Americans across the country.
A $1,000 stimulus check could soon be headed your way
The good news is lawmakers are taking this abrupt halt in economic activity with utmost seriousness and, as of late Wednesday night, March 18, were continuing to make progress on what could easily be a more than $1 trillion fiscal stimulus package. While there are many layers to this stimulus proposal, including roughly $300 billion earmarked for small business loans, the headline number is that every American who filed a tax return would be eligible to receive a $1,000 stimulus check.
The hope for the federal government is that this $1,000 check will ease some of the burdens caused by coronavirus mitigation measures, or even better, lead to consumption. Moody's Analytics has estimated that every $1 in economic stimulus given to Americans in 2008 during the financial crisis resulted in $1.55 to $1.71 in economic activity.
However, not everyone is going to need to put their stimulus check toward covering basic essentials. Folks with healthy emergency funds may be best-served trying to compound their $1,000 Trump stimulus check over time in the stock market.
Let's not forget that, even with the recent beating stocks have taken, the market has historically returned an average of 7% annually, inclusive of dividend reinvestment. This means your invested capital will, on average, double once a decade. If you're 30 years old and receiving a $1,000 stimulus check, you could turn that into $32,000 by the time you're 80 years old, based on historic return figures.
So where should you consider investing your Trump stimulus check? Here are three stocks to strongly consider buying, assuming the proposed payouts become law.
Aside from oil and gas companies, I haven't seen an industry rocked harder over the past month than credit service providers. The obvious worry here is that coronavirus mitigation efforts, vis-a-vis an economic shutdown, will result in a huge drop-off in consumption and a likely surge in credit delinquencies. This is a problem considering that consumption is responsible for approximately 70% of U.S. gross domestic product.
While payment-facilitation giant Visa (V 4.51%) isn't entirely immune to this expected and unpredictable spending slowdown, it's also nowhere near in as dire shape as Wall Street is making it out to be.
For one thing, Visa isn't a lender. Although some of its competing payment processors also lend (e.g., Discover Financial Services), which can boost profitability during times of economic boom, economic shocks can also lead to rapidly rising delinquency rates. Since Visa doesn't lend, it doesn't have to worry about these rising delinquencies.
Visa is also the kingpin of the U.S. payment-processing market. Between the financial crisis and 2018, Visa expanded its market share, in terms of network purchase volume, by more than 10 percentage points to 53%, leading to nearly $2 trillion crossing its U.S. networks in 2018. During the financial crisis, when spending was substantially curtailed by consumers, Visa experienced only one year with modest purchase-volume retracements. In fact, an argument could be made that plastic will be leaned on more than ever given the current lack of economic activity.
Additionally, don't overlook Visa's overseas opportunity. Since 85% of overseas transactions are still conducted in cash, it has a long growth runway ahead of it.
I've said it before and I'll say it again: Just because there are disruptions in the economy, it doesn't mean fewer people get sick or need medicine. That makes the majority of healthcare companies no-brainer buys on significant dips. More specifically, though, I'm singling out pharmacy chain CVS Health (CVS 2.33%).
Why has CVS Health shed close to a quarter of its value over the past month? Aside from market sentiment, the only compelling negative I can come up with is the possibility of less in front-end sales as shoppers stay home. However, it's important to realize that front-end sales ("front-end" meaning non-pharmacy goods, such as grocery and household items) are a low-margin means of attracting foot traffic. Lower front-end sales may hurt the top line but they'll have minimal impact on CVS Health's profitability.
Comparatively, pharmacy sales should remain robust, and CVS is likely going to capitalize on its combination with health insurer Aetna, which was acquired in 2018. Pharmacy margins are quite a bit more important to CVS' bottom line than its front-end sales and, as noted, this abrupt economic downturn doesn't mean prescriptions are any less needed than they were one month ago.
Meanwhile, Aetna's organic growth rates are likely to provide a lift to CVS' long-term growth potential, with cost synergies realized in 2020 and beyond improving earnings per share.
In other words, you're not going to get lightning-quick growth with CVS Health, but at a forward price-to-earnings ratio of 7.5 and a yield of 3.5%, it looks like the time to buy.
Investors would also be wise not to overlook semiconductor giant Broadcom (AVGO 2.52%), which at one point on an intraday basis as of Wednesday, March 18 had lost half of its value over the trailing month.
Broadcom's woes within the past couple of sessions have been a bit easier to understand than with, say, Visa or CVS Health, because Broadcom warned that it wouldn't meet its previously issued guidance due to COVID-19. Since Broadcom makes wireless chips for smartphones and connectivity and access chips for data centers, it means we're seeing some pretty significant short-term disruption among next-generation technology sales and launches.
However, this disruption isn't expected to be long term. Within the telecom industry, we're on the precipice of the biggest technology upgrade cycle in a decade with the launch of 5G networks. These faster download speeds should lead to increased data usage and storage, as well as a push toward 5G-capable wireless devices. This plays perfectly into Broadcom's long-term strategy as a go-to player in wireless connectivity and access chips.
Maybe the best part about Broadcom is the company's dividend. Since Broadcom's proposed acquisition of Qualcomm was nixed by federal regulators in 2018, it had a lot of cash and nowhere to spend it -- so it's been boosting its payout significantly. Over just the past four years, Broadcom's quarterly payout has risen from $0.49 (March 2016) to $3.25 per share (March 2020). For those of you keeping score at home, Broadcom now boasts a yield of almost 7%.
Broadcom should be a solid turnaround candidate once this coronavirus crisis is in the rearview mirror.