Find A Haven In Cash-Rich Companies

• The market is off ~15% as of writing this article, which presents a buying opportunity in strong companies.
• Focus on the balance sheet and cash-rich companies that can invest when others are fearful.
• Do not try to time the bottom, just accumulate when you think it is right and gradually.

Thesis

Coronavirus presents a great opportunity to buy strong companies with cash to deploy when markets turn. There are several technology companies we recommend buying in this correction over time, based on their cash positions.

This strategy presents the upside of depressed valuation along with the safety of a cash haven, without moving to gold or cash itself.

Balance Sheet “Rich”

The most notable names that fit this strategy are Apple (AAPL), Google (GOOGL), Berkshire Hathaway (BRK.B), Facebook (FB), Amazon (AMZN), Ford (F), Oracle (ORCL), Cisco (CSCO), and Bristol-Myers (BMY). This list includes the familiar technology names but bought as a basket can present an opportunity to gain exposure across autos, financials, and healthcare.

In addition, it happens that many of these businesses are clearly levered to the economy. Although we do not know the full economic impact that the virus will have, early evidence shows that it will be significant. But markets tend to gain and sell off more than they should on a fundamental basis, which is where the alpha lies.

Indicators of Damage

Here are some early indicators of the material impact that the virus may have. These indicators suggest a softening of ~10% of value in future EPS estimates and even less in the 2+ year time frame. Of course, estimates could always be revised downward, so take them with a grain of salt.

• Nomura recently cut EPS and revenue growth guidance for payment networks like Visa, Mastercard, PayPal, and Square to reflect the virus headwinds. These cuts reflect overall macroeconomic softening and are a decent indicator of macro trends.

Source: https://seekingalpha.com/news/3549839-nomura-trims-payment-network-eps-estimates-may-come

Several companies are pulling guidance or saying they will not meet guidance. These estimates have resulted in a 5%-10% decline from previously announced figures.

• Booking.com pulled Q1'20 guidance
• Microsoft issued a wider than usual range due to the virus (5% spread between low and high end of guidance)

Sources: Booking -1.8% after pulling Q1 guidance , Microsoft update on Q3 FY20 guidance — Stories

Given the combination of this top down and bottoms up analysis, I believe companies will be materially impacted between 5%-10%, whereas most have sold off more than that. Given the cash-rich nature of some of the names like Microsoft, I believe they offer upside combined with cash protection.

Disclosure: I am/we are long AAPL, MSFT, AMZN.