The dichotomy of the stock market has never been more pronounced than it's been since the onset of the COVID-19 pandemic. While some businesses -- like those involved in e-commerce and digital payments -- have been able to capitalize on the rapid changes in consumer behavior, others have suffered brutal setbacks.
For investors with a three- to five-year time horizon, this represents a compelling opportunity to heed the sage words of legendary investor Warren Buffett:
I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.
With fear currently holding back some top-shelf businesses, it's time to get greedy. Let's look at three top-notch companies that have been beaten down by the coronavirus, but which still have excellent long-term prospects.
Until COVID-19 reared its ugly head, Disney (NYSE:DIS) was riding high. The global multimedia powerhouse was fresh off the acquisition of assets from 21st Century Fox and had recently launched its Disney+ streaming service. Additionally, the company closed out 2019 with a record year in theaters, led by seven movies that took in $1 billion or more at the box office.
Then the wheels came off.
With the onset of the pandemic, Disney was forced to close its theme parks and resorts, dock its cruise ships, and shutter its retail stores. Even more importantly, its movie production facilities -- which act as a linchpin for its entire kingdom -- shut down, suspending the creation of new intellectual property. While most of the theme parks have reopened, they are limiting the number of visitors. And with studios reluctant to release new films at a time when most people are unwilling to visit the multiplex, the major movie theater chains have just announced a new round of closures.
Yet it always seems darkest before the dawn, and there are reasons to be upbeat about the future of the House of Mouse. Last quarter, revenue from Disney's media networks segment (which includes its television networks and cable channels) slipped by just 2% year over year, while operating income for the segment -- by far the company's largest -- climbed 48%. And the performance of Disney+ stood out as well: It surpassed 60.5 million paid subscribers as of early August, a benchmark it wasn't expected to reach until 2024.
Disney was firing on all cylinders before the pandemic hit, and there's no reason to expect that won't pick up right where it left off as soon as this health crisis is in the rear-view mirror.
2. Axos Financial
In broad market sell-offs, there's a common phenomenon of traders dumping good and bad stocks alike, also known as "throwing out the baby with the bathwater." That may well be what has driven down the price of Axos Financial (NYSE:AX), formerly Bank of the Internet.
There's little doubt that bank stocks as a group have much more to lose if the country's ongoing economic malaise grows worse. As a commercial banker, Axos will likely see an uptick in loan defaults -- and concerns about such losses have helped drag its share price down by about 17% so far this year.
Yet despite that, there are plenty of reasons for investors to buy Axos stock while it's still on sale. For its fiscal 2020 (which ended June 30), Axos delivered record net income of $183 million, up 18%. Its fiscal fourth-quarter net income of $45 million was up by nearly 12% year over year, while its net interest income climbed nearly 17% to $117 million. This resulted in a net interest margin of 3.89%, far ahead of the industry average of 2.89%.
Other metrics show Axos is as strong as ever. The efficiency ratio of its business banking operations (lower is better) edged down to 49% from 51.1% in the prior-year quarter. This means the company spent just 49 cents of every dollar to fund its operations. To put that in context, the average commercial bank had an efficiency ratio of 60.31% in the second quarter.
Finally, Axos tangible book value -- which measures the value of the company's assets -- continued to increase this year, growing to $18.28 per share from $15.10 in the prior-year quarter.
Admittedly, those are a whole lot of numbers to digest, but the takeaway is clear: While there are still potentially rough waters ahead, Axos is well-positioned to ride out this crisis and reward forward-looking investors.
The pandemic delivered a one-two punch to Hasbro (NASDAQ:HAS). First, the toymaker lost a good many of its brick-and-mortar sales channels when retailers focused on nonessentials temporarily closed. In addition, its acquisition of television and movie studio eOne late last year now seems ill-timed at best. Hasbro's revenue took a 30% hit in the second quarter, turning its prior-year profit into a loss.
All is not lost, however, as those Q2 results were better than the headline numbers suggest. Excluding acquisition-related expenses and severance costs, the company delivered a meager profit. Additionally, Hasbro has been working to streamline its operations and pivot more toward e-commerce channels, a strategy that will continue to pay dividends long after the pandemic is a distant memory. There was an immediate positive impact as well, as nearly 30% of toy and game revenue coming from online sales during the quarter.
There were other gems hidden amid the bad news, as greater numbers of consumers turned to board games to while away some of the additional hours they were spending at home. Revenue from the gaming segment grew 11% year over year, also driving increased demand from retailers, which increased by more than 50% globally.
The holiday season -- historically Hasbro's biggest quarter -- is fast approaching. With a greater number of retail stores now open again and gains made in the e-commerce arena, the toymaker could return to profit in the months to come, though challenges remain. And the market's current pessimism about the world's leading toymaker is giving investors an opportunity to buy its shares at a significant discount.
The chart tells the tale
While the S&P 500 is back in positive territory for 2020, each of these three companies is still down for the year. However, if history is any indication, these stocks represent compelling opportunities. During the Great Recession, Hasbro, Axos, and Disney lost 26%, 36%, and 54% of their value, respectively, only to come roaring back. They've gained 284%, 2,200%, and 677% in the years since.
Investors with a sufficiently long timeline should be loading up on these industry leaders while they're still on sale -- because we can't expect their current bargain prices to last for long.