March 2020 was one of the most brutal months on record for investors, and though many stocks have started to rebound, most still sport double-digit declines on the year. More pain could be in store as the full extent of the economic fallout from the coronavirus pandemic is only just beginning to be felt. Nevertheless, history says that the time to buy is in the midst of downturns, not after the coast is clear. Thus, I'm doubling down on my long-term holdings in Hasbro (HAS -2.40%), Texas Roadhouse (TXRH -1.35%), and Square (SQ -3.73%) and buying more shares.
1. Hasbro: Toys and digital playtime on the cheap
I started scooping up more shares of toymaker Hasbro in March, and though it has rallied strongly off of its lows, the stock is still down over 30% from its highs. The dividend currently yields 3.6% a year, and the company is valued at 17.7 times 2019 free cash flow -- not cheap, but not bad, either, considering the company was still dealing with lost business from the Toys R Us bankruptcy the year prior and investing in new digital sales outlets.
The real reason I'm buying, though, is that Hasbro has made key investments to set itself up for the next decade of playtime. Losing Toys R Us hurt, but I think there will end up being a long-term silver lining to that dark cloud as it forced Hasbro to start taking e-commerce more seriously. An extension of its licensing agreement with Disney (DIS -1.31%) making toys for the Marvel superhero and Star Wars franchises was a shred of good news back in February as well.
And then there's the success the company has had with its Transformers brand, tapping the global box office to create new ways for fans to enjoy its toys. That template is now being applied to other areas like the Magic: The Gathering card game classic, its acquisition of Power Rangers, and most recent takeover of the studio responsible for Peppa Pig and PJ Masks. The coronavirus hurt the latter deal as it has left the company with $4.1 billion in debt (nearly equal to 2019 revenue).
But Hasbro may have lucked out, since toys and digital games are likely to be in high demand during shelter-in-place orders, providing some safety net for Hasbro's operations that other, less fortunate businesses don't have. And with digital playtime becoming increasingly important, I like Hasbro's leadership on this front. Though the immediate future is foggy, the stock looks like the real deal for its long-term potential.
2. Texas Roadhouse: Best-in-class eating out in suburbia
One of the far less-fortunate industries in the current economic climate has been restaurants, and Texas Roadhouse hasn't been spared. With the stock down 26% so far in 2020, investors should brace for at least two quarters' worth of ugly financials as the steakhouse chain deals with sharp decreases in eating out.
Full-service restaurants are among the hardest hit in the industry as to-go and delivery orders have traditionally never been a large mix of their business. Texas Roadhouse -- which operates primarily in suburban areas where competition is less intense than in densely populated urban markets -- has also largely avoided emphasizing takeout. It's never needed to, as foot traffic steadily increased at its stores over the years even as the industry suffered from declines due to overexpansion. But in mid-March, Roadhouse expanded to-go and curbside service and has yet to announce any outright store closures. That's the good news, although it's almost certain to mean sales will be down sharply with dining rooms closed.
That also means any profitability metrics to value this stock should be tossed out. But in times like now, balance sheets come into focus. With Texas Roadhouse sometimes criticized for its slow-and-steady expansion over the last decade, in contrast with the on-average restaurant industry overexpansion, I think history will show was a good steward of its assets while herd mentality ruled elsewhere. Roadhouse had zero debt and $108 million in cash and equivalents in the bank at the end of 2019, giving it the ability to draw down all of its revolving credit line of $190 million to raise its cash on hand to over $300 million as of March 19 -- with the option to draw another $200 million if needed.
Disciplined growth doesn't always win over fans during the good times, but Texas Roadhouse's solid balance sheet gives it more than just a fighting chance at surviving and resuming its measured growth once the dust settles. Not all brands can boast being in the same position. I'm an active acquirer of this best-in-class restaurant operator.
3. Square: A small business champion of the future
This stock isn't nearly as cheap as it was during the worst of the coronavirus crash -- down as much as 40% from recent highs in February -- but war-on-cash stock Square remains a long-term value play. The stock has been trading in volatile sideways action for two years now, even as the business continues to grow at a fast pace.
Of course, Square is going to experience its fair share of the crisis. With falling economic activity comes lower digital payment transactions, and Square's bread-and-butter remains small- and mid-sized businesses that are getting some of the harshest treatment during the COVID-19 perpetuated recession. While the company reported a strong start to the year in January and February, things were deteriorating quickly in its merchant ecosystem in March, slightly offset by better performance in its peer-to-peer money movement service Cash App. First-quarter 2020 sales are now expected to be $1.30 billion to $1.34 billion, up at least 36% year over year but slightly below previous guidance. More updates will be forthcoming but expect results in the second quarter to deteriorate further.
It isn't as well established as digital payment giants like Mastercard (MA -2.20%) or even fellow payment platform and peer-to-peer money app PayPal Holdings (PYPL -2.28%) (which owns Cash App competitor Venmo), but fast-growing Square is on solid footing. It ended 2019 with $2.1 billion in cash and investments in the bank, giving it some wiggle room to maneuver in troubled waters as well as invest in further expansion. Plus, while things could get bad for a while, the long-term trend favoring digital payments just got a boost due to the pandemic. That bodes well for Square's long-term prospects.
Its reliance on small business means revenue in the short term will take a hit, but the smaller and faster-growing Square now trades for 6.1 times trailing 12-month revenue compared with 7.1 times revenue for PayPal. For those looking years down the road, Square stock looks like another deal to seriously consider right now.