Over the past few weeks, stock prices have dropped 12% across the board. Yes, pretty much all stocks are down 12%, and this is reflected in index funds like Vanguard Total Stock Market Index Fund (VTI). What’s happening? As news has it, it’s the Coronavirus scare that’s at fault.
Okay, so there’s a lot of overly sensationalized news out there about how people’s behaviors are changing in light of the Coronavirus outbreak, but are some of the claims legitimate? Sure, some are, but most are not, as we will see from our deeper analysis.
Better yet, the question to ask with the stock market is this: Which stocks have a great opportunity opened up for buying? With everyone loosing confidence in the stock market, stock prices are going down and the “clearance isle” effect is providing an excellent opportunity to buy valuable stocks at a low price. Chances are that the Coronavirus outbreak will be limited in time, so when the stock market resumes back to normal, low-valued stocks today will grow to a competitively higher value in the future.
First of all, let’s start with the essentials of the Coronavirus outbreak. The Coronavirus originated in China, and our main fear of its spreading is through international transportation, in particular human international travel because (1) it typically uses the fastest means of travel such as air travel and (2) humans are living creatures that function as a better host for the Coronavirus than, say, the surfaces of raw materials and manufactured goods.
Okay, so in light of the stock market, you’d assume the primary businesses to be affected by the Coronavirus outbreak is any business that deals with long distance travel. Think airlines, cruise lines, and overseas freight shipping companies. These are businesses whose sales and profitability are literally being degraded by legislated travel restrictions, and rightfully so because we don’t want the virus to spread! But also, in some sense, it is like these businesses are “artificially” undervalued because short-term decreases in profitability meant their stock prices went down. Secondarily, you might assume that companies that provide complementary services to travel, such as hotels, restaurants, and vehicle rental companies would also have their stock prices being hit harder.
Let’s do some cursory research on Wikipedia to get the list of companies to look at.
20200228/https://en.wikipedia.org/wiki/Carnival_Corporation_%26_plc
20200228/https://en.wikipedia.org/wiki/United_Airlines
20200228/https://en.wikipedia.org/wiki/Delta_Air_Lines
20200228/https://en.wikipedia.org/wiki/List_of_largest_airlines_in_North_America
20200228/https://en.wikipedia.org/wiki/Radisson_Hotel_Group#Country_Inn
20200228/https://en.wikipedia.org/wiki/Marriott_International
20200228/https://en.wikipedia.org/wiki/McDonald%27s
20200228/https://en.wikipedia.org/wiki/Hapag-Lloyd
20200228/https://en.wikipedia.org/wiki/List_of_largest_container_shipping_companies
Next, I’ve taken a cursory look of some of the mentioned companies on a stock market information website.
So, my consensus? The economic complements to travel… like hotels and restaurants, those are hardly feeling a dent, no more than the stock market overall at 12% stock price decrease. But, airlines and cruise lines themselves, they’re the ones getting hit hard, about 25% down across the board. However, Alaska Air hardly feels a dent from the Coronavirus scare, approximately 8%, similar to the rest of the stock market at 12% down. Again, these are all pretty good businesses that will resume normal activity once the Coronavirus outbreak is under control, and they were doing fairly well before the Coronavirus outbreak.
Companies for freight shipping at sea? Well those are all based countries other than the U.S., and I pretty much can’t see anything at all in data for these, they are shown as “over-the-counter” markets, which means they’re not listed on major stock exchanges like the New York Stock Exchange (NYSE).
Finally, down to the process of elimination, do you really want to own these businesses? Between airlines and cruise lines, both businesses involve inherent risks and disasters. Cruise lines are obviously a minority compared to commercial air travel. But there’s a final factor to consider. What is their ethical standing? Can you live with the sins they’ve committed in the past, and their disposition on how that likely affects how they will act in the future?
Carnival Cruise lines, well they’ve been dumping oil into the oceans mixed in with their bilge water. Okay, first offense, been doing it for a couple of years, they get fines and probation for the next 5 years, that’s fine. But then as soon as they’re probation period ends, they do it again? And when on probation again, they do it yet again? And they’ve been deliberately falsifying records on how much they’ve been dumping? Unacceptable. Dumping oil in water, yeah that’s really bad, not the place you want to dump oil if you must dump it somewhere.
Okay, so MY PICK of individual companies to invest in, and the proportions to invest adjusted by the size of their business (I used Wikipedia’s count of their passengers carried in 2019):
- American Airlines, 1/1x
- Delta Air Lines, 1/1x
- Southwest Airlines, 1/1.3x
- United Airlines, 1/1.3x
- Air Canada, 1/4x (over-the-counter market)
- Alaska Air Group, 1/4x
- JetBlue Airways, 1/4x
- Spirit Airlines, 1/6x
- Allegiant Travel Co., 1/12x
- Hawaiian Holdings Inc., 1/20x
Use $200 for 1/1x share as baseline to multiply and round to number of shares. Total investment = 4.588x max = $917.692 baseline investment.
Another question is how much to invest out of your entire stock portfolio? Where you you stop when it comes to adding “more” money into your airline investments?
Let’s start with an easy way of explaining. Right now the whole stock market is down 12%. If you invest 10% into airlines and 90% into the total stock market, the worst things can get long term is that you loose everything in the airlines and are left with 90% in the rest of the stock market? Is that a tolerable risk? I think so.
Let’s say the worst things could get is that airlines go down 50% long term, so you can invest up to 20% in airlines and 80% in the rest of the stock market and have the same degree of risk.
But finally, there’s the philosophical approach, of primary goals. You only want to be investing artificially more in airlines short term because they are relatively undervalued short term. So of course that’s how you’re putting your money in the short term… and if you are catching up for existing missed investment opportunities in the past, you are not going to put that on the line.
For me, it’s like 3 years catch-up and one year present. So yeah, say 20%, then adjust by 1/4, so that’s 5%. So for me, actually 5% is pretty much the hard cap. I would be able to exceed that only if I am extra opportunistic such that I would be willing to sell some of my total stock market shares to increase my share in airline stocks short-term.