This has been a truly wild year to be an investor. During the first quarter of 2020, Wall Street and investors endured the swiftest bear market decline in history. But by the second quarter, they were privy to the strongest quarterly move higher since 1998. These baffling moves come courtesy of the uncertainty tied to the COVID-19 pandemic.
There's no question that there will be clear long-term winners of the pandemic, but some industries should be slapped with caution tape. Despite their popularity in recent weeks or months, I'm purposely avoiding the following three industries.
If you thought cloud computing, cybersecurity, and telemedicine were hot industries, feast your eyes on electric vehicle (EV) manufacturers. On a year-to-date basis (through July 14), Tesla (TSLA -1.10%) is up 263%, NIO (NIO 1.22%) has gained 251%, and Workhorse Group has galloped higher by 443%. Meanwhile, Nikola (NKLA -1.40%) and Tortoise Acquisition have more than quadrupled and doubled, respectively, in the past three months.
There's little doubt that EVs represent the future of the automotive world. But one thing is for certain -- they aren't the present. Despite the hype, EVs represent only around 2% of total U.S. sales, even though plug-in EV sales surged by at least 20% every year between 2012 and 2018, save for 2015. On a global basis, they represent about 2.2% of total auto sales.
It's going to take a long time before EVs become staples on the roads in developed countries. Similarly, ensuring that adequate infrastructure is in place to meet the needs of a growing plug-in EV fleet isn't going to happen overnight.
However, companies like Tesla, NIO, and Nikola are being priced as if everything will go off without a hitch and that the transition to EVs will be complete in five to 10 years. The adoption of every new technology over the past quarter-century suggests that this isn't going to be the case. There are always hiccups in the adoption and development process, and changing the buying habits of consumers takes a long time.
When I look at the EV industry, I see:
- Tesla: A company that still hasn't produced a generally accepted accounting principles (GAAP) profit, and is producing a fraction of the vehicles Toyota cranks out on an annual basis, yet is somehow the most valued auto manufacturer in the world;
- NIO: A Chinese EV producer that abandoned its opportunity to build its own vehicles in 2019 and is still trying to secure additional financing; and
- Nikola: An EV truck producer that doesn't have a dime in sales to its name, yet is rivaling Ford in market cap.
If you ask me, it's all lunacy, and it's an industry I'm staying far away from.
I'm socially distancing myself from the casual dining space. While there are clear winners that I wouldn't dare bet against, like pizza powerhouse Domino's, the industry is otherwise full of businesses with growth strategies that COVID-19 has completely undercut.
The issue for restaurants is twofold. First, the longer the pandemic continues, the more consumer behavioral habits could change. Eating at home or relying on takeout or delivery services could become the norm, potentially hurting the profitable in-store dining experience.
Second, restaurant chains often rely on debt to finance expansions. This has left some highly indebted restaurant chains, like Bloomin' Brands (BLMN -1.61%), the company behind Outback Steakhouse and Bonefish Grill, in potentially precarious situations. Bloomin' ended the first quarter with over $2.9 billion in total debt and had around $400 million in cash. However, the company is expected to lose a significant amount of money in 2020 and is no lock to make money in 2021.
But it isn't just dine-in chains that I worry about. Fast-casual chain Jack in the Box (JACK -0.58%) has a particularly strong presence in southwestern states. We've already seen California Gov. Gavin Newsom roll back indoor dining privileges to curb the spread of the novel coronavirus. Meanwhile, cases of COVID-19 are spiking in Arizona, and Nevada has the highest unemployment rate among the 50 states. Jack in the Box is not well-positioned to thrive during the pandemic, even with a model that would seem to encourage takeout and drive-thru.
I'm not even a fan of restaurant chains that are thriving. Chipotle Mexican Grill (CMG -2.63%), for example, is up 32% year to date, as its fresher foods and delivery partnerships continue to resonate with consumers. But this rise doesn't mask the fact that Wall Street's 2020 earnings-per-share estimates are down almost 25% from where they were three months ago, or the fact that the company is valued at 58 times next year's forecast earnings. This is a food company, not a tech stock. A forward valuation this aggressive makes little sense in the current environment.
I've saved the best of the worst for last: the airline industry.
There's perhaps no industry that COVID-19 has brutalized more than airlines. At the trough in early April, passenger traffic in U.S. airports had fallen 96% from the prior-year period, as measured by Transportation Security Administration screenings.
There are many reasons I want nothing to do with airline stocks now or in a post-pandemic environment.
They face the same uncertain long-term future as restaurants. The longer the pandemic persists, the more folks might choose road trips or other means of travel that don't subject them to the possibility of infection or the inconveniences associated with flying.
The airline industry is also a capital-intensive, low-margin business. Recessions and economic contractions are inevitable parts of the economic cycle, yet airlines have repeatedly shown that they're ill-equipped to survive any but the most minor of these normal contractions.
Airline stocks also tend to lean heavily on debt financing to modernize their fleets and fund expansions. American Airlines Group (AAL -1.71%) is the poster child for debt mismanagement. At the end of March, American Airlines had close to $3.6 billion in cash and cash equivalents and a whopping $34.1 billion in total debt. Even with lending rates at historic lows, American recently floated the idea of raising $3.5 billion at a ghastly interest rate of 12%. Time and again, debt financing gets the airline industry in trouble.
But maybe the biggest issue with the airline industry is the new lack of share repurchases and dividends. As part of accepting Coronavirus Aid, Relief, and Economic Security (CARES) Act funds for distressed industries, major airlines are now barred from buying back their stock and paying dividends. Buybacks and dividends might have been the only aspects of airline stocks that made owning them tolerable; it certainly wasn't their margins or balance sheets.
With COVID-19 clipping the wings of airline stocks, it's an industry I'm pretty convinced I'll never buy into.