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How to Pick the Best Stocks to Buy During The Coronavirus Sell-Off

By Nicholas Rossolillo – Apr 3, 2020 at 10:50AM

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Lots of stocks are on sale, but whittling down the field to the best buys is imperative.

When the going gets tough, it's time to go shopping. Easier said than done, though. For many investors, the question that's been grappled with is whether or not to sell stocks. At this point after the market's awful run in March 2020, selling out and calling it quits would -- in most circumstances -- be a mistake.

But for those investors with at least a few years to wait things out and the resolve to pull the trigger, the market is awash in bargains. A lot of attention gets paid to a company's sales momentum. While growth is most certainly an important factor, it's only one way to whittle down the field of best stocks to buy during the COVID-19 crisis.

First stop, enduring growth

Every economic crisis is different, so while dusting off the old playbook will yield some old ideas that work once more -- big-box store retailers like Walmart (WMT -0.93%), for example -- the current pandemic is creating a new set of circumstances for which investors need to be prepared. Specifically, in a world that was already headed the way of digital, that movement just got a big boost from shelter-in-place and work-from-home orders.

A woman with thought bubble and bag of cash illustrated above her head.

Image source: Getty Images.

Thus, many firms will actually get a bump from a world post-coronavirus. But the trick is finding those players that will have enduring growth, not just a one-time boost. To start, I'd look at companies that were already benefiting as organizations invested in data centers, cloud computing, and connectivity infrastructure. The cloud was already riding momentum, but many organizations have been exposed as woefully unprepared. For starters, I think Microsoft (MSFT -0.97%)Amazon (AMZN -0.54%), and (CRM -0.49%) are basics in this space that are helping organizations update their operations.

Digging a little deeper, connectivity infrastructure and web content delivery networks (CDNs) are another idea that has thus far outperformed the market on its tumble lower. To that end, Arista Networks (ANET 0.45%) and its open-source network hardware could benefit over the long-term. The same goes for CDNs like Fastly (FSLY 0.75%) and Limelight Networks (EGIO -2.89%). All three of these web infrastructure stocks are handily beating the market this year and have strong long-term growth prospects as the need for web services increases over time.  

Don't forget the balance sheet

An often-overlooked shred of information when the good times are rolling is balance sheets. In times of crisis, though, this important metric becomes even more critical. Companies with inadequate cash on hand and/or sizable sums of debt lack the flexibility needed to navigate disruption.

To that end, while big tech firms like Microsoft and Amazon were hot stocks in the last decade for their fast and steady revenue growth, they should remain top picks now because of their solid financial positioning. At the end of 2019, Microsoft had cash, equivalents, and short-term investments net of long-term debt totaling $70.9 billion. Amazon was in a similarly enviable position with $31.6 billion in net cash and short-term investments.

Paired with a company's enduring ability to generate growth, a strong balance sheet means a business can remain nimble when an economic crunch hits and continue to make investments for long-term expansion. 

Free cash flow and margin

Finally, there's the bottom line. Rather than use basic earnings per share, though, free cash flow (revenue less cash operating and capital expenses, excluding non-cash expenses like depreciation and amortization) is a much better measure of a company's true ability to generate profit. I'll pick Netflix (NFLX 1.39%). The leader in streaming entertainment has been one of the biggest winners of the last decade and had 167 million paying subscribers at the end of 2019. Resulting revenue increased by 28%.  

However, content creation to pick up all those new subscribers is costly, and Netflix has been running free cash flow negative for years -- negative $3.14 billion in 2019 to be exact. That was good for a negative free cash flow margin (free cash generation divided by revenue) of negative 15.5%. For a company already so large, that's a lot of cash burn, shortfalls that Netflix has been making up via issuing new debt. At the end of the year, the company had $14.8 billion in long-term liabilities and $5.02 billion in cash and equivalents.

This is but one example, and free cash flow is only one metric. But it's an important one that directly feeds into a business's balance sheet and ability to sustain expansion. It's going to take a big hit to the bottom line with the temporary closure of its theme parks and heavy spending to get its own streaming service up to speed, but I prefer Disney (DIS -0.75%) as a long-term entertainment stock because of its track record of positive cash generation with its vertically integrated business. 

NFLX Revenue (TTM) Chart

Data by YCharts.

For investors with a long time horizon, the market sell-off has presented ample opportunity to make new purchases. And history says now is the time to buy -- whether an ultimate bottom has been registered or not. There are plenty of quality companies trading at massive discounts to where they were a month ago, but focusing on those with the most enduring growth models and strongest cash positions should yield the best returns when an economic recovery begins.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Arista Networks, Microsoft,, Walmart Inc., and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Arista Networks, Fastly, Microsoft, Netflix,, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney, long January 2021 $85 calls on Microsoft, short April 2020 $135 calls on Walt Disney, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$240.02 (1.39%) $3.29
Microsoft Corporation Stock Quote
Microsoft Corporation
$246.79 (-0.97%) $-2.41, Inc. Stock Quote, Inc.
$120.30 (-0.54%) $0.65
The Walt Disney Company Stock Quote
The Walt Disney Company
$100.04 (-0.75%) $0.76
Salesforce, Inc. Stock Quote
Salesforce, Inc.
$155.46 (-0.49%) $0.77
Walmart Stock Quote
$131.68 (-0.93%) $-1.24
Edgio, Inc. Stock Quote
Edgio, Inc.
$3.02 (-2.89%) $0.09
Arista Networks Stock Quote
Arista Networks
$121.90 (0.45%) $0.55
Fastly Stock Quote
$9.39 (0.75%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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