There are definitely winners and losers from the stay-at-home economy caused by COVID-19. But since the market has rebounded, a lot of the stay-at-home stocks may be close to fair value -- or even above it. Meanwhile, many of the "losers" of the outbreak in the travel, leisure, hospitality, and big-ticket consumer discretionary sectors have taken huge hits. Like, revenue-going-to-zero-type hits.
Thus, many out-of-favor stocks have plunged to very, very low levels; however, those low levels are largely justified, given the outsize risks of bankruptcy or dilution associated with all affected sectors.
Yet help could be on the way. Last week, the Federal Reserve added to its unprecedented bond-buying program, extending the program to even buy junk bond ETFs. Junk bonds are below the coveted "investment-grade" line, meaning they're some of the highest-risk, highest-yielding debt out there, funding the most troubled companies. With the Fed taking the unprecedented step of backstopping a portion of those loans, bond-buyers now appear willing to lend at the most affected companies, and perhaps extend their lives through the pandemic... albeit at a price.
Should the new infusions of cash enable these companies to survive and stave off bankruptcy, their stocks may actually be worth looking at, at least at some point, as their upside is huge. However, they would only be buys for investors with a high risk appetite.
AMC Entertainment and Cinemark
Movie theater chains AMC Entertainment (AMC -4.49%) and Cinemark (CNK -0.71%) have been hit especially hard from COVID-19. Movie theaters are now closed through June at least, with the potential to have those closures extended beyond that time.
Making things worse, AMC Entertainment in particular was already heavily indebted before the crisis, making it a bankruptcy candidate. In a recent release, the company says it has cash capacity to operate through June at zero revenue.
However, AMC just priced another $500 million bond with a huge yield of 10.5% at the end of last week, due in 2025. That's a pricey debt issuance indeed, but when your options are either that or bankruptcy, issuing any sort of debt could potentially extend the company's life. In that same release, AMC said the $500 million should enable the theater operator to stay liquid until a partial reopening at Thanksgiving.
Cinemark is in a much better position in terms of its debt load, at only two times net debt to EBITDA. Still, it also needed a lifeline to get through another several months of potentially zero revenue and was able to issue $250 million in debt yielding 8.75% last week -- a better rate than AMC for sure, but still relatively high.
Cinemark and AMC are each banking on customers' ability to come back to theaters before a vaccine is available. That means potentially spaced-out, partially full theaters with temperature checks. In addition, theaters have to contend with the threat of convenient streaming options at home. As such, it's no surprise bond investors were still asking for high yields as they extended lifelines.
Both companies may also receive federal aid through the $2.2 trillion CARES Act stimulus package, though neither company has received confirmation as to whether they'll receive those funds as of yet. That could further help these ailing theater operators.
- $3.5 billion of 8.5% notes maturing April of 2023.
- $3.5 billion of 9% notes maturing April of 2025.
- $1 billion of 9.625% notes maturing April of 2030.
The automaker had said before the capital raise that it had enough liquidity to last through the end of the third quarter, should all of its factories outside China remain closed. I happen to think Ford's factories will be at least partially running by then, given that the company's China factories have already reopened as that country slowly emerges from its lockdown.
Ford's $8 billion cash infusion will likely buy it more time. Nevertheless, once the world emerges from COVID-19, it remains to be seen how well auto sales hold up in what is sure to be a recessionary environment. That means big-ticket items such as autos will be a difficult sell, even after the crisis has subsided. Throw in the potential disruption from electric vehicles coming in the next few years, and Ford's outlook is murkier than ever, even if it doesn't go bankrupt. That's why I thought Ford was an example of a low-quality stock to sell in the early days of the crisis.
Finally, Carnival Corporation (CCL 3.94%), the world's largest cruise line, also lined up a $6.45 billion infusion on April 2, finding willing bond-buyers even before the Fed extended its program to junk bonds.
The cruise line probably won't be eligible for federal bailouts since it's domiciled in a foreign country. That meant Carnival had to go out and raise some of the costliest money around, selling very high-yield debt, convertible bonds, and even equity at fire-sale prices, including:
- $4 billion in 11.5% senior notes due 2023.
- $1.95 billion in 5.75% convertible notes due 2023, with a conversion strike price of $10.
- $500 million in equity, issuing 62.5 million shares at $8.
The $6 billion-plus infusion should keep the cruise line afloat for the foreseeable future. In addition, the fact that one insider bought $10 million worth of shares in the equity offering, while the Saudi Arabia Public Investment Fund (PIF) bought 8.2% of the company at $8, is another positive sign that the company can survive over the next year before it begins sailing again in some sort of capacity. In fact, the recent moves were enough to lure me aboard, as I actually bought a very small amount of Carnival shares last Monday, in the higher-risk part of my portfolio.
Do these raises make them buys?
While I believe cruising will eventually come back to former demand levels, Ford, AMC, and Cinemark face more difficult roads back, given that they are also in industries facing potential disruption: Ford with electric cars, and the movie theaters with on-demand streaming. I had once believed movie-going would last for a long, long time, and I still think it might. Nevertheless, the recent COVID-19 outbreak caused me to sell all of my AMC common stock months ago, and I'd have to see more evidence that movie-going is returning to buy back into the shares, even at these bargain-basement levels.
So while all three companies have gotten much-needed lifelines, their stocks are still very risky to own. However, if there is any positive news on reopening the economy earlier than thought, or if news of a treatment or vaccine emerges sooner than people think, these stocks could surge, given their very depressed levels.
But until then, investors shouldn't place any bets on these names that they aren't willing to lose.