The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide


The bubble isn’t burst yet.


Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite
COMP,
-1.99%

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle
ORCL,
+0.66%

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
ZM,
-1.32%
.
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
PTON,
-3.75%
,
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
RIO,
-1.67%
,
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures
ES00,
+0.65%

NQ00,
+0.64%

were stronger.

Gold futures
GCZ20,
-0.46%

fell while oil futures
CL.1,
+0.21%

edged higher.

The British pound
GBPUSD,
+0.18%

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla
TSLA,
+1.38%

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple
AAPL,
-3.26%
,
Alphabet
GOOGL,
-1.36%

and Facebook
FB,
-2.05%

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify
SHOP,
-1.59%

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.



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A Stock Picker’s Guide To William O’Neil’s CAN SLIM System


In 1988, William O’Neil published How to Make Money in Stocks, which has apparently sold over two million copies since then. In this article, I’m going to take a close look at O’Neil’s techniques, philosophy, and system.

O’Neil calls his system CAN SLIM after the first letters of each of its principal seven components. Unfortunately, it sounds more like a diet than an investing system – and indeed, O’Neil’s writing has a lot in common with diet books.

In my opinion, some of O’Neil’s guidelines make no financial sense and could be very harmful to investors, while others are tremendously valuable. At the end of the article, I’m going to create a screen that follows all of his rules and demonstrate why it simply doesn’t work.

O’Neil versus O’Shaughnessy

William O’Neil and James O’Shaughnessy are from very different generations: O’Neil was born in 1933 and O’Shaughnessy in 1960. Both of them have devoted a considerable portion of their lives to examining stocks that outperform the market. But they took very different approaches.

O’Neil made a special study of “superstar stocks” whose prices doubled, tripled, or went even higher. He was interested in finding out what these stocks had in common with each other. O’Shaughnessy, on the other hand, studied the market as a whole, and tried to find factors that effectively classified stocks into potential winners and losers.

These very different approaches had very different results, predictably.

Let’s take betting on horses as an analogy. The O’Neil approach would be to look at winning horses and see what they had in common. The O’Shaughnessy approach would be to classify all possible bets not just according to the characteristics of the horses but according to the betting odds.

The odds in betting are similar to the prices in the stock market. In parimutuel betting, odds are determined purely on the basis of how interested the aggregate bettors are in each horse, just as in the stock market the price is determined purely on the basis of how interested the aggregate investors and traders are in each stock. This, as both O’Neil and O’Shaughnessy recognize, is valuable information indeed.

In looking at horses (and what I write here is purely hypothetical, based on no data at all, and given purely for illustration), O’Neil might have noticed that horses who are likely to win often have odds that have gotten lower in the last few weeks, like a horse whose odds have gone from 4:1 to 5:2. O’Shaughnessy might have noticed that the highest payoffs are on safe, reliable horses with little glamour whose odds are uncharacteristically high – 20:1 or higher. Thus, O’Shaughnessy favors unglamourous stocks that are underpriced, while O’Neil favors stocks that are making new highs; O’Shaughnessy finds that high-growth stocks underperform, while O’Neil finds that they outperform.

But there’s another major difference in their approaches. Before O’Neil even approaches the historical study of a stock, he knows whether it was a winner or loser. He comes to the investigation of stocks armed with foreknowledge. O’Shaughnessy, on the other hand, sets up backtests to test his theories and does his utmost to avoid look-ahead bias. He wants to find factors that will predict whether a stock’s price will rise or fall without knowing the answer in advance.

It’s pretty obvious which approach is more “scientific” and which is more calculated to appeal to a broad audience. The promise of stocks that double or triple in value is easy to sell; the promise of avoiding look-ahead bias will only appeal to the statistically minded investor. That’s why O’Neil’s newsletter, Investors Business Daily, has over 100,000 subscribers who each pay over $400 a year, and why his book has sold over two million copies. O’Shaughnessy’s success, while considerable, pales in comparison.

Chart Patterns

How to Make Money in Stocks (I read the fourth edition, published in 2009) starts with dozens of pages devoted to charts illustrating cup-and-handle patterns; more of these recur throughout the book (the head-and-shoulders pattern also plays a large part). I’m afraid that I personally have no patience with these charts. Each of them shows a pattern and what happened in the days immediately after the pattern. Most of them show a sharp rise in the stock’s price immediately after the pattern comes to an end. This, to me, is all anecdotal evidence, or twenty-twenty hindsight. What about all the stocks that experienced a sharp rise without ever having a cup and handle in their charts? What about all the cups and handles whose price subsequently fell? Could you recognize a cup and handle if it were on the very right side of the chart, before the subsequent rise? Take a hundred random stocks and chart them, stopping on some random date in 2019. How many have cup-and-handle patterns on the right edge of the chart? I’m sure there must be at least four or five. What happened to those stocks after that random 2019 date? Did they all zoom up? Or did some of them take a plunge? Now, take ten random stocks. In each one, go back in time and find a six-month period of great price appreciation. What patterns do you see immediately before that six-month period? Now, go back and time and find a six-month period of great price depreciation. What patterns do you see immediately before that plunge? Is there any real difference?

A large number of academic papers have been written on using chart patterns to predict stock prices, and the near-unanimous conclusion is that they simply don’t work very well. There is practically no statistically significant evidence for them, and it’s not for lack of trying. A typical study, dating from 2017, is Empirical Evaluation of Price-Based Technical Patterns Using Probabilistic Neural Networks, which also includes an overview of previous studies. (The overview, unfortunately, mixes up studies of momentum factors with studies of chart patterns; the former have been shown to work, over and over again.) This particular study “reveals that no pattern produces statistically and economically significant profits for a cross-section of stocks and indices analyzed.” And that’s after the author, Samit Ahlawat, who is very well versed in technical analysis, has carefully identified and studied dozens of different patterns, all of whose results he carefully tabulates in his article.

The C in CAN SLIM

“C = Current Big or Accelerating Quarterly Earnings and Sales per Share.”

O’Neil found that explosive quarterly earnings were the most predictive of all the factors he looked at when he examined what his “superstar stocks” had in common before their huge increases. In doing so, he focused primarily on the growth in quarterly earnings per share over the same quarter the previous year.

In my own research, I have found that this factor – whether you use net income as your basis, or operating income, or EBITDA, or the current quarter’s earnings estimate, or all of them – is indeed a very powerful predictive force when it comes to short-term price gains. Nothing in the CAN SLIM system is, to my mind, more important than this one factor. In fact, of the stocks I currently own, 80% of them sport earnings growth of over 25% by this measure, which is O’Neil’s threshold, and I’ll probably sell most of those that don’t quite soon.

O’Neil also emphasizes the importance of some sales growth and introduces the idea of accelerating growth. Again, he’s right on the money here. If I had to choose one chapter of How to Make Money in Stocks that all short-term investors (those who typically hold stocks for less than a year) should read, I would choose this one.

The A in CAN SLIM

A stands for Annual Earnings Increases. Here, O’Neil argues that we should invest in companies with high annual earnings growth and high return on equity. He also devotes considerable space to attacking the use of the P/E ratio and claiming that stocks with high P/E ratios can be superb bargains.

Below are six bar charts. For each of them, I took one factor and ranked, using Portfolio123, all US stocks with a price greater than $15 (O’Neil recommends limiting your choice to such stocks) on one factor against other stocks in the same sector, with monthly rebalancing, excluding N/As from consideration. (The leftmost bar is the S&P 500.) The left three charts reflect the compounded returns over the last ten years, the right three over the last twenty.

The top row is EPS growth, the most recent quarter compared to the same quarter last year (the C in CAN SLIM). Clearly, the top half of stocks on this measure perform better than the bottom half.

The second row is EPS growth, the most recent trailing twelve months compared to the twelve months before that (the A in CAN SLIM). Clearly, stocks with middling annual EPS growth outperform stocks with high or low annual EPS growth.

The third row is trailing-twelve-month P/E, with lower numbers on the right. While P/E makes absolutely no difference over the last ten years, over the last twenty, low P/E stocks have outperformed high P/E stocks more forcefully than high EPS growth stocks have outperformed low EPS growth stocks.

In short, I don’t believe this chapter offers any useful advice. In fact, limiting yourself to stocks with very high annual growth will exclude many of the stocks most likely to outperform. And I strongly believe that low P/E compared to stocks in the same industry is a valuable factor in deciding what stocks to buy.

The N in CAN SLIM

N stands for new, as in “Newer Companies, New Products, New Management, New Highs off Properly Formed Bases.” As far as new products go, quite a few industries (energy, mining, utilities) are not going to be offering many of those. But O’Neil doesn’t spend much time on such companies, devoting half the chapter to promoting stocks that are making new highs. The following bar charts rank stocks on how close they are to their twelve-month high price.

As you can see, companies that are very close to their twelve-month high price are not primed to outperform.

The S in CAN SLIM

S stands for supply and demand. Here, O’Neil advocates buying companies with low floats – in other words, small companies – because they have much more room to grow than big companies. He also advocates investing in companies that buy back shares. Both of these, in my opinion, are excellent ideas.

The L in CAN SLIM

L stands for Leader or Laggard. One way to tell whether a stock is a leader or a laggard is to use a multifactor ranking system to do so, something that O’Neil hints at when he writes,

“By number one, I don’t mean the largest company or the one with the most recognized brand name. I mean the one with the best quarterly and annual earnings growth, the highest return on equity, the widest profit margins, the strongest sales growth, and the most dynamic stock-price action.”

I’m a firm believer in ranking stocks, and it looks like O’Neil likes to do so as well.

The I in CAN SLIM

I stands for Institutional Sponsorship. O’Neil suggests that winning stocks already have a significant number of institutional investors, and that investors look for stocks that are followed by quality portfolio managers and sport an increasing number of buyers. But he also warns against stocks that are oversubscribed. This is excellent advice: stocks with an increase in institutional holders do better than stocks with a decrease; it’s not a bad idea to avoid stocks with fewer than twenty institutional holders; and it’s very wise to avoid the fifty stocks with the largest percentage of their shares held by institutions.

The M in CAN SLIM

O’Neil argues that if you try hard enough, you can predict the direction of the market as a whole, at least in the short term, so that you know when to buy stocks and when to go to cash. “In your analytical tool kit,” he writes, “you absolutely must have a proven, reliable method to accurately determine whether you’re in a bull (uptrending) market or a bear (downtrending) market.”

This strikes me as a fool’s errand. I’ve written at length on market timing, so I won’t spend time on it here. Suffice it to say that O’Neil offers no sure tips on market timing, instead advising readers to check certain ratings and columns in IBD. Characteristically, IBD published a column on March 31st entitled “Corona Virus Stock Market Crash: Here’s How to Spot a Market Bottom.” This was eight days after the market bottomed, and IBD was advising investors what to look for. In fact, the biggest one-day percentage gain of the entire year so far was on March 24, the day after the market hit bottom. If you missed that gain because you’d gone to cash, you were probably a victim of the belief that you could time the market. Because I know I can’t time the market, I remained fully invested, lost a third of my money, and then proceeded to more than double what I had left.

In sum, when it comes to CAN SLIM, I like four out of O’Neil’s seven rules: C, S, L, and I.

The Most Dangerous Part of the Book

Right at the beginning of Part II is the most dangerous part of O’Neil’s book: his advocacy of selling any stock you own that goes down in price more than a certain percentage. “Always,” O’Neil writes in boldface,“without Exception, Limit Losses to 7% or 8% of Your Cost.” This is a classic example of anchoring bias and one of the biggest mistakes novice investors make (yes, I made it too when I was a novice investor). Remember: the future price of a stock is completely unrelated to the price you paid for it. The price you paid for it is irrelevant. It’s absolutely worthless information. Never look at the price you paid for a stock when you’re trying to decide whether to sell, hold, or buy more.

“Now hold on,” O’Neil might say. “What I’m talking about is simply smart money management. Cut your losses before they become big.”

But every time you sell a stock, you forego the chance that it’ll rise in price. And if a stock has just fallen in price over the last week or two, it has a better than 50% chance of rising in price over the next week or two (stock prices tend to mean revert over the short term). Not only that, by selling, you are locking in your loss. Is that smart money management?

When to Sell

O’Neil follows this chapter with another on when to sell, which is based on the principle of looking for what he calls “climax tops.” Once again, the pages are full of charts and patterns. The chapter is long and complicated, full of advice like this:

“Sell if a stock closes at the end of the week below a major long-term uptrend line or breaks a key price support area on overwhelming volume. An uptrend line should connect at least three intraday or intraweek price lows occurring over a number of months. Trend lines drawn over too short a time period aren’t valid.”

For the same reasons I dismissed chart patterns earlier, I can’t put my faith in this.

Money Management

O’Neil’s chapter on money management has some good advice in it, but it’s also full of “told-you-so” charts illustrating the falls of Enron and AIG (NYSE:AIG). It’s here that O’Neil finally lays out his rules for what stocks to consider: a minimum price of $15 per share and no OTC or foreign stocks. I can’t understand why he buries these most basic rules at this point in the book.

The 21 Mistakes to Make

O’Neil has a delightful chapter, appropriately the 13th, called “Twenty-One Common Costly Mistakes Most Investors Make.” I’m quite proud to say that in my investing I deliberately make more than half of these 21 “mistakes” every day. Clearly, O’Neil and I are from different investing universes. Here are the “mistakes” I make:

  • I stubbornly hold on to my losses (when I have good reason to believe the stock will increase in price).
  • I buy on the way down in price. Let’s say I buy a diamond bracelet for $500 and plan to resell it for more. Then, I see an identical bracelet for $400. Why wouldn’t I buy that one too?
  • I average down in price. Same as above.
  • I don’t learn to use charts.
  • I don’t have “specific general market rules to tell when a correction in the market is beginning or when a market decline is over.”
  • I fail to “understand the importance of… learning how to use charts to significantly improve selection and timing.”
  • I select “second-rate stocks” because of low price/earnings ratios. A lot of my biggest investing successes have been in totally “second-rate stocks.”
  • I want “to make a quick and easy buck.” Every day, every week, every month. It’s by making lots of quick and easy bucks that you can compound your winnings.
  • I cash in “small, easy-to-take profits” when a stock I hold no longer ranks highly and I “hold the losers” when those losers rank highly.
  • I worry “too much” about taxes and commissions (and transaction costs).
  • I never transact at the market, placing only limit orders, and spend hours trying to get good fills.

Investing Like a Professional?

When Part III, called “Investing Like a Professional,” rolled around, I was wondering if the book would ever end. The hucksterism begins to get truly wearisome.

“Regardless of your current position in life or your financial standing, it’s clearly possible for you to make your dreams come true using the CAN SLIM system. You may have heard or read about the thousands of individuals who have changed their lives using this book and Investor’s Business Daily. It really happens, and it can happen to you if you are determined and have an overpowering desire, no matter how large or small your account… as long as you make up your mind, work at it, and don’t ever let yourself get discouraged.”

It’s almost like a parody of a self-help book, and a far cry from “investing like a professional.” The professionals I know have no patience with language like this – which is followed by dozens more cup-and-handle stock charts illustrating successful stocks.

Thankfully, there is some more material of value after this. O’Neil wisely advocates investing in industry groups that are leading the market. I think this is such valuable advice that it should have been added to the CAN SLIM system. There’s a lot more in this part; but I think I’m on the verge of exhausting the reader. So, let’s move forward to chapter 20…

The CAN SLIM screen

O’Neil concludes his book with a list of “important rules and guidelines to remember” that summarizes the rest of the book. I have used this list, along with material from the rest of the book, to create a stock screener on Portfolio123, which I used as a basis to simulate O’Neil’s investing system.

Here are the screening rules:

  1. price greater than $15
  2. no foreign or OTC stocks
  3. annual EPS growth greater than 25% each of the last three years
  4. projected EPS growth greater than 25%
  5. most recent quarter’s EPS growth (over same quarter last year) greater than 25%
  6. previous quarter’s EPS growth (ditto) greater than 25%
  7. most recent quarter’s sales growth (ditto) greater than 25% OR greater than trailing twelve-month (TTM) sales growth (acceleration)
  8. ROE greater than 17%
  9. current quarter’s profit margin higher than TTM profit margin
  10. price closer to the 52-week high than the 52-week low
  11. relative price strength (as measured by the 52-week price change) in the top 15%
  12. the number of institutional holders has increased over the last year
  13. a minimum of twenty institutional holders
  14. avoid the top fifty stocks most held by institutions
  15. avoid the 20% of industries with the weakest six-month price gains

But there’s a major problem with this screen: no stocks pass it. If I use FactSet data, only 58 stocks have passed this screen over the last 15 years. (The most recent are Enphase Energy (ENPH), Netflix (NFLX), Hamilton Lane (HLNE), and ServiceNow (NOW), all of which passed the screen at one point or another since April.) During the entirety of 2019, only one stock passed the screen – Amazon (AMZN) for a couple of weeks in January.

And how do the stocks which do pass the screen fare?

Terribly. If you had bought each of the stocks that passed the screen over the past 15 years and held each for six months, you would lose an average of 6% per stock. If you changed your sell rules so that you sold if the stock went 7.5% below its purchase price or if the most recent TTM EPS change was worse than it was a year ago (both rules that O’Neil strongly advocates), your average return rises to -1.4%, which is still terrible.

CAN SLIM in the Real World

IBD has put a modified version of the CAN SLIM system into practice in an ETF whose ticker is FFTY (Innovator IBD 50 Fund); it holds the top fifty stocks according to IBD’s own criteria and rebalances weekly, with a higher portfolio weight assigned to the top-ranked tickers. The ETF’s performance is nothing to write home about: although it’s up over 6% YTD, it has lagged the S&P 500 over the last year, the last three years, the last five years, and since its inception in April 2015.

AAII has three CAN SLIM screens with different criteria for each. The first has a ten-year annualized performance of 6.3%, the second 10.7%, and the third, which is based on the third edition of How to Make Money in Stocks (I’ve been using the fourth), 23.5%. All of these numbers are out of sample. If you had put an equal amount of money into each of them ten years ago, you would have outperformed the S&P 500 by 2.8% per annum. These screens are very well-designed, but necessarily leave out many of the requirements of CAN SLIM.

The CAN SLIM Antidote

At the same time as I read How to Make Money in Stocks, I also read Mohnish Pabrai’s The Dhando Investor. Pabrai is a follower of Warren Buffett, and in this book, he expounds on the mantra of value investing by using interesting examples of Indian immigrants who have bought businesses and made fortunes on them. It’s a short and quite repetitive book, and his maxims I found too simple to be really useful. But there’s one concept that I think is well expressed and likely to lead to investing success: concentrate on low-risk but high-uncertainty assets.

Many assets are underpriced because of high uncertainty about their prospects. The prospects of a few of these assets can be broken down into, say, a half-dozen possibilities. If each of the possibilities is low-risk (a high margin of safety) and a few of them are high-return, you’ve got yourself a relatively risk-free bargain with massive potential.

I don’t think you could find two immensely successful investors and authors with more opposing viewpoints. Both of their books are easy to read and full of anecdotal evidence, though O’Neil’s book is about four times as long. While it’s not easy to backtest O’Neil, it’s impossible to backtest Pabrai. But my gut tells me he’s right.

My takeaway? There are lots of ways to invest. Learn from the masters, but keep your inner meter on high alert.

My marketplace service, The Stock Evaluator, comprehensively ranks over 5,000 stocks weekly based on a sophisticated multi-factor system with deep roots in accounting and valuation methods. It has a terrific out-of-sample record: since the service began over 2 years ago, high-ranked stocks have consistently outperformed the market while low-ranked stocks have massively underperformed it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.





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Craving Technology: A Beginner’s Guide And Top 12 Picks


Introduction

Software is Eating The World! – Marc Andreessen

You may have heard this or something similar in the past. And what this essentially implies is that technology is transforming how we experience the world or businesses operate. So as mere mortals, should we be trying to chase the hottest investment theme in the world or save ourselves by buying either the S&P 500 or any other safe ETF of choice? Today, my hope is to demystify the sector itself, show what drives its different sub-sectors, and how to invest in the sector with high conviction.

Before I get started, I want to let you know that this is my second article in the “Craving” series. In these write-ups, I hope to provide a high-level overview of a sector and discuss key sub-sectors and investment themes within it. My first article was on Healthcare – one of the top-performing sectors of the S&P 500 over the last decade – and it was very well received. So if you haven’t yet, you should definitely check it out.

I also want to clarify that I am looking at Technology from a five-year view and not looking to debate how the sector would trade in the short term, especially if there is a sharp reversal in investor sentiment.

Now, coming back to the topic of the day. The table below (last updated July 2020) neatly summarizes the performance of all the key sectors within S&P 500 over different periods. Technology (NYSEARCA:XLK) has outperformed every other sector and the S&P 500 (NYSEARCA:SPY) by a wide margin and over almost every period. The only other two sectors that have outperformed the S&P 500 are Healthcare (NYSEARCA:XLV) and Consumer Discretionary (NYSEARCA:XLY) – almost 24% of which is Amazon (NASDAQ:AMZN).

Source

The outperformance has been so wide that if 10 years ago, you had invested $10,000 in XLK, it would have grown to ~$59,400, while the same in SPY would have resulted in ~$36,200. Almost $23,200 (~64%) more. So what does it mean for us?

Past performance is no indication of future returns. And there have been countless investors in the past who were allured by a new shiny object and burned themselves by running towards it.

I don’t think this is one of those situations. This outperformance hasn’t come by accident as there are secular tailwinds leading to this. Plus, I don’t see any structural changes in the recent future that would serve as a headwind for the sector. Having said this and even though I am a growth investor, I don’t just put my hard-earned money anywhere unless I am confident that the combination of current valuations and future growth justifies the price I’m paying for a business today. So let me start with sharing the three key reasons why I think the sector would be a winner in the long term:

  • Secular Growth – Technology along with Healthcare is enjoying secular tailwinds that will continue to propel both revenue and earnings in the mid to long term. From my perspective, it all boils down to two words – effectiveness and efficiency. Every business on the entire planet is looking to better engage with their customers and it could be through marketing their product in new ways (e.g., Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL)), leveraging new shopping platforms (e.g., Amazon and Shopify (NYSE:SHOP)) or using new enterprise applications to better understand customers and build relationships (e.g., Salesforce (NYSE:CRM) and Adobe (NASDAQ:ADBE)). At the same time, every organization wants to operate more efficiently and hence investing in technology and automation whether through cloud infrastructure (e.g., Microsoft (NASDAQ:MSFT) and AWS) or SaaS platforms (e.g., Workday (NASDAQ:WDAY) and ServiceNow (NYSE:NOW)) or collaboration tools (e.g., Zoom (NASDAQ:ZM) and Slack (NYSE:WORK)). You get the point.
  • Volatility – We have all learned that to get higher returns you need to take high risk. Considering Technology has left every other sector and the index itself in the dust, it should also exhibit higher volatility or drawdowns when the market goes south. You would be surprised to know that it’s not the case. Technology has outperformed the S&P 500 during good times and was able to hold relatively well during bad ones. The first table below shows that XLK experienced a maximum drawdown of only ~17.4% compared to ~19.4% for SPY, full 2% points lower. The second table below shows calendar year returns of different sectors, and even in 2018 – when SPY was negative – XLK outperformed SPY by ~2.9%. Don’t you love this?

Source

  • Valuation – You may have already led to believe that technology stocks have risen a lot, and there is no value left in them. I hold a different view. I agree they are expensive, but for a valid reason. And I have an imminent belief that if we are holding solid stocks with earnings visibility for the long term, earnings growth can cover the premium prices we may pay today. But let’s explore how expensive the sector is. The excellent charts below from Yardeni Research show that Technology forward PE is 25.8 compared to 22.0 for the S&P 500. A bit more expensive, but as soon as we look at the PEG ratio (PE / EPS growth), we are looking at a ratio of 2 for Technology compared to 2.1 for the S&P 500. Well, that’s not bad.

Source

So by now, I am hoping that you are convinced that Technology is a must-own sector and are ready to place your order for XLK. Hold on. Let’s look under the hood and explore how to untangle the sector further.

Background

So before I get into the details, let me share my investment beliefs. You can skip this section if you have read my prior articles.

  1. Conviction – I don’t invest in anything unless I am convinced about the story. This lets me stick with a stock whether it’s sunshine or rain, and it has served me well in the past.
  2. Growth – I believe a lot of people misunderstand growth. It’s as simple as the power of compounding. Considering my focus on total returns, I always value companies that show their ability to grow revenues profitably.
  3. Flexibility – I don’t think as a retail investor, we need to marry ourselves to a single investing style (e.g., high dividend, dividend growth). Even if you prefer dividend growth, it shouldn’t stop you from picking Google or Facebook, if you believe in their story.

My own portfolio is spread across ~40-45 securities, and I divide them into 3 buckets:

  1. Consistent Compounders – Proven business models, above-average growth rate (Medium Risk, Medium-High Return) – Think of GOOGL, UnitedHealth Group (NYSE:UNH), Honeywell (NYSE:HON).
  2. High-Flyers – Growing at a rapid pace, may have little to no profits (Medium-High Risk, High Return) – Think of AMZN, Netflix (NASDAQ:NFLX), Peloton (NASDAQ:PTON).
  3. Special Situations – Depressed valuations due to short- to mid-term challenges such as loss of confidence in management, significant debt, or industry overhangs (Medium-High Risk, Medium-High Return) – Teva (NYSE:TEVA), Simon Property Group (NYSE:SPG), AT&T (NYSE:T).

You can read more about my journey, investment beliefs, and allocations to these buckets here. Now it would become easier for me to take a deeper dive into the Technology sector and help you in developing a strategy that can outperform broad indices.

What makes up Technology?

I have been using XLK as the proxy for technology so far in this article, as it is the most widely used gauge, so makes it easier to pull the sector level research. But honestly, I prefer the iShares Expanded Tech Sector ETF (NYSEARCA:IGM) rather than XLK as some sector shake-ups in 2018 led to moving some of the core technology stocks such as Facebook and Google to Communications sector. Further, Amazon has been part of the Consumer Discretionary for a long time. So let me give you an overview of the differences between the two.

Source: XLK Holdings

Source: IGM Holdings

Let me highlight the three key differences between the two:

  1. As you may notice, only IGM provides you exposure to some of the core technology stocks such as Amazon, Facebook, and Google.
  2. I don’t know about you, but I don’t like ~45% of the portfolio being concentrated in just two names when I am investing in a relatively broad ETF.
  3. IGM has only 53% of its assets in the top 10 holdings compared to 70% for XLK, so your portfolio is a bit more diversified, plus you are buying ~300 stocks in IGM compared to only 71 holdings for XLK. So a bit more opportunity to expose to smaller tech names.

Overall, if you are an occasional investor and don’t have the bandwidth or interest to invest in 10 different stocks in one sector, do yourself a favor, and go ahead and buy IGM. If it’s the only tech name in your portfolio, make sure it has enough allocation (40-50%) and stop reading the article. For everyone else, who are as crazy as me, let’s dive deeper.

I will start with giving you a snapshot of the IGM sector breakdown from BlackRock.

Source

I agree it’s a lot to digest. So to simplify this, I’d divide technology into four broad sub-sectors/industries:

  1. Consumer Technology / Internet (e.g., Amazon, Facebook)
  2. Enterprise Technology (e.g., Microsoft, Adobe)
  3. Semiconductors (e.g., Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA))
  4. Industry specific tech companies – Fintech, HealthTech (e.g., Mastercard (NYSE:MA), Teladoc (NYSE:TDOC))

I believe industry-specific tech companies are more correlated to their specific sectors and should be discussed along with them e.g., assess fintech companies with financial services stocks. So, the focus of my article is on the first three categories – Consumer Technology, Enterprise Technology, and Semiconductors. I wish I had perfect ETF proxies for these categories, but I will make do with the following ones:

Consumer Tech – First Trust Dow Jones Internet ETF (NYSEARCA:FDN)

Enterprise Tech – iShares Expanded Tech-Software Sector ETF (BATS:IGV), WisdomTree Cloud Computing ETF (NASDAQ:WCLD)

Semiconductors – iShares PHLX Semiconductor ETF (NASDAQ:SOXX)

I am using two different ETFs for the enterprise tech sector as there seems to be a lot of interest in emerging cloud companies, and WCLD provides broad coverage of those. So without further delay, let’s look at how these sub-sectors have performed compared to Technology as a whole and SPY.

Source

WCLD is a very new ETF so we don’t have its long-term performance, but as far as YTD performance is concerned, it has left all its technology peers in the dust. I guess you may have already guessed this, as all the emerging cloud stocks are going through a melt-up period. But leaving that on the side and looking at the 10-year performance, each of the sub-sector ETFs has outperformed SPY by a significant margin, so there is some value in unpacking them further. You would also notice that the performance differential is not that high between IGM and the sub-sector ETFs, so there is nothing wrong with a strategy revolving around buying the broad technology gauge and calling it a day. By the way, this performance is consistent over all the periods including 10 years, 5 years, 3 years, and 1 year. So before we drill down further, let’s have a quick look at what these ETFs/sub-sectors consist of.

Source: FDN, IGV, WCLD, and SOXX respectively

You would notice that all the ETFs (except WCLD) are fairly concentrated in their top 10 holdings, which is normal for a sub-sector ETF. WCLD is an equal weight ETF, so its weightings are more equally distributed, which is a good thing, as the point of investing in something like WCLD is to generate alpha through the performance of the smaller players. Now the reason I said these ETFs are not perfect because I don’t see Salesforce and Veeva (NYSE:VEEV) as internet play but more of enterprise tech names, so they belong in the latter category. Further, lines are blurring between hardware and software, so I do believe something like Apple (NASDAQ:AAPL) belonging to FDN.

Anyways, the whole point of going through this exercise is to get better clarity on why we are investing in a particular name and what may drive future returns. So let’s explore each of these subsectors a bit more, and if we understand the fundamentals of these holdings, we should get some perspective on the past as well as the future potential of these subsectors. Here is a snapshot of some key metrics of the top 10 stocks in each of these sub-sectors (made some adjustments for Consumer Tech e.g., dropping Salesforce, Cisco (NASDAQ:CSCO), Veeva, added Apple).

Consumer Tech

Source

This list contains who’s who of the technology industry and most of these are household names. But that’s not it. Look at the mean return of ~32.7% CAGR over the last five years. It’s phenomenal. There have been a few duds such as Booking (NASDAQ:BKNG) and Twitter (NYSE:TWTR) but that’s it. And all these great returns are supported by incredible revenue and EPS growth. So the five stocks with 30%+ CAGR return over the last five years also have 15-30% revenue growth YoY. Keep in mind all these businesses have very low marginal costs so a big portion of the revenue directly flows to the bottom line i.e., revenue growth of 15% may mean EPS growth of 30% or even higher. One stock that is running more on multiple expansion than on revenue growth is Apple – its revenue and earnings are growing at ~6.5% and 12.7% respectively, but it has delivered 30%+ CAGR returns and is now trading at ~30 Forward P/E. Unless something changes dramatically, Apple may end up trading sideways for the next few years till earnings catch-up. So if not Apple than which ones are my favorite? I am listing these in my priority order.

Facebook (part of Consistent Compounders bucket) – I am not exaggerating when I say this – Facebook is the most undervalued large-cap tech stock period. If you don’t want to pay up for quality, go ahead, and buy Facebook. It’s expected to compound its earnings at ~26% over the next five years which means its 2024 earnings would be 3 times its 2019 earnings. All this and it still trades at mere 33-34X earnings. I wouldn’t be surprised if the Facebook stock crosses $500 as soon as next year.

Amazon (part of High-Flyers bucket) – I’d admit it. It took me a long time to understand Amazon’s potential because I kept looking at its high PE multiples and never realizing its cash flow generation capabilities. Based on TTM, it is only trading at 31 times its cash flow from operations. Further, they have grown their Operating Cash Flow @~31% every year (it’s ~40% for the last three years, so growth is not slowing), ~15X in 10 years. Isn’t that incredible? So I am more than happy to pay 30-60 times earnings for a business that can grow their cash flow at the clip of 30%. And if the stock price gets stuck at the current level for a couple of years, we would be looking at a business growing @30% and trading @~18 times cash flow, and that would make it even more attractive. Don’t miss this one.

Google (part of Consistent Compounders bucket) – Yes, it’s a bit more expensive than Facebook, and the growth rates are not as high, but Google will stay entrenched in our lives one way or another and continue to drive revenue with the shift of ad spending towards digital. So for me, it’s a clear Growth at Reasonable Price (GARP) play that can double over the next five years.

Netflix (part of High-Flyers bucket) – I recently wrote at length about Netflix here. Netflix’s ability to leverage global content, untapped potential to drive revenue from multiple mediums and proven management may cement its position as the top entertainment player. Not undervalued, but I’d be surprised if it doesn’t cross $1,000 over the next five years.

Booking (part of Consistent Compounders bucket) – It has been trading sideways over the last couple of years, but I do see a great business that will continue to compound earnings, and current valuations are super attractive. A hard recommendation in the current environment.

Enterprise Tech

Source

Enterprise Technology is a fairly large bucket, but think of it as any business that makes the life of other businesses easier through technology. They come in all shape and form, but you can primarily divide them between software and hardware, though the lines are blurring with the cloud. The proxy ETFs I used here are more focused on the software side of things so you may see names such as IBM (NYSE:IBM) and Cisco missing. I have also included two sets of tables to showcase IGV and WCLD holdings respectively. You may notice that I changed the columns a bit, as it’s better to look at them from price/sales perspective than earnings multiples at this moment.

IGV holdings – It’s tilted towards large caps. And you may notice, it has performed exceptionally well over the last five years, in fact, better than its Consumer Tech players. This is happening because every business is trying to transform how they operate and these tech players are the lifeblood of that transformation. You may also notice the consistency of returns (except Oracle (NYSE:ORCL), of course). So you can easily buy and hold IGV and let these cloud players do the work for you. If not, my favorites are – Adobe, Salesforce, Workday, ServiceNow, and Microsoft. Let’s go through them.

Workday (part of High-Flyers bucket) – If you compare the Current Price to Sales with Five-Year Average for any of these stocks, they have gone up. Means people are paying more as they are realizing the importance of these businesses. The only exception is Workday, as there is a perception that its growth is slowing. I don’t think so. Workday is continuing to expand its TAM by investing in new areas (e.g., Workday Student), and it has immense potential. At less than $200, it’s a steal.

ServiceNow (part of High-Flyers bucket) – My second favorite. Similar to Workday but the stock is expensive @~24x Sales compare to 12x for Workday. But its sales growth has been slightly higher, and people believe it will continue to be elevated. A good buy below $400.

Microsoft (part of Consistent Compounders bucket) – Don’t we all love Satya Nadella and what he has done with Microsoft. Microsoft is not cheap especially considering slower sales growth, but Satya has changed Microsoft’s image by positioning it to be a true business partner in the journey toward digital transformation, and that may continue to propel the organization forward.

Adobe and Salesforce (in my watch list) – Both of them are great businesses, though Salesforce seems to be cheaper. I do think Salesforce is a good buy at current levels, and Adobe would become one if there is a 15-20% pullback.

WCLD holdings – Folks, this is the wild west. There are many gurus who may tell what to buy and what not to. But no one knows what would work and what would not in the mid to long term. Every business here is trading at 30, 40, 50, or even 60-time sales. Are these fair valuation – maybe or maybe not. We would only know the true winners after the fact. Though, there is nothing wrong with buying the ETF itself with solid diversification across 60+ holdings at the expense of less than 0.5%. Personally, I own Shopify, but I bought it in the low 100s. The management is visionary, the business is extremely scalable and marginal cost is low – but would it continue to perform as well as in the past. I don’t know.

I also own Slack, PagerDuty (NYSE:PD), and Alteryx (NYSE:AYX) from this group. But honestly, I would advise to just buy WCLD and call it a day.

Semiconductors

Source: Morningstar

This bucket has also performed extremely well, but also notice the variation in returns between individuals stocks (from 8% to +114% CAGR for the five-year period). The 10-year period returns look better. The semiconductors are very cyclical and dependent on that star chip that carries the company forward. I don’t hold any of the semiconductor stocks just because I have no clue how to dissect these businesses. If you are from the space, and know it well, good for you. If not, one can either buy the ETF itself or something else where you have more conviction. The two stocks that I like from this space are a bit less cyclical – Texas Instruments (NASDAQ:TXN) and ASML Holding (NASDAQ:ASML).

Final Thoughts

Technology has driven the markets in the last decade and will continue to do so. Technology will underpin every incredible customer experience and can drive huge efficiencies for businesses. Looking within the sector, every sub-sector has performed very well, though Enterprise Tech is my favorite along with Consumer Tech companies. I have shared some of my favorite picks in both of these sub-sectors. You can check my full portfolio here.

If one understands the emerging cloud or semiconductors space well and can pick winners – that’s great. For everyone else, it might be better to either buy their respective ETFs or avoid them.

The more important piece is to ensure enough allocation to the technology sector as a whole, and it’s not as expensive as you may think. So if you don’t have enough energy to buy 10 different stocks form the sector – go ahead and buy IGM, and you will thank me in 2024.

By the way, you may have noticed that I didn’t mention COVID even a single time in the article. As long-term investors, we should not be considering these short-term concerns unless something has fundamentally changed. And for the Technology sector and sub-sectors and most of the players, I don’t think COVID has made any meaningful long-term impact – positive or negative – apart from accelerating some pre-existing trends that were.

If you like the material and want more, click “Follow” to receive instant notification when I publish the next one. Also, leave a comment with your thoughts on the analysis.

Disclosure: I am/we are long AMZN, GOOGL, FB, MSFT, NFLX, BKNG, WDAY, NOW, SHOP, AYX, PD, WORK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Coronavirus update: U.S. death toll tops 73,000, as Trump administration shelves ‘too cautious’ CDC guide on reopening


The Associated Press was first to report that the government had rejected the advice of its own public-health agency and had told the CDC a draft guide on reopening schools, restaurants, summer camps, churches, day care centers and more “would never see the light of day.” The recommendations included detailed flow charts to be used by local officials.

The news comes as an impatient Trump has repeatedly pushed for states to reopen, supported protests against lockdowns and other restrictions and contradicted medical advice from experts on the task force created to manage the pandemic.

“Local leaders and small businesses are looking to Washington for help ensuring safety for themselves, their workers, and their customers as this pandemic continues to ravage the country,” said Kyle Herrig, president of Accountable.US, a nonpartisan group. “Instead of offering them assistance, Trump is opting to hide the expertise of his own administration’s scientists and public health professionals. What could Trump possibly gain by hiding this guidance, besides covering up his rush to reopen and his administration’s failures with the COVID-19 response?”

On Wednesday, the president backed off plans to wind down the task force after a backlash from Democrats, public health officials and experts, coming at a time when the U.S. infection rate is still growing, including in states that have started to allow small businesses and shops to reopen.

Trump acknowledged that reopening will cause more deaths, but has pressured state governors to move quickly to restore an economy that has been hit hard by stay-at-home orders, closed stores and plants and other restrictions.

Governors continue to push for more and better testing, looking to other countries like Germany and South Korea that have used a disciplined, scientific approach to testing and contact tracing allowing them to restore some activity while successfully containing the spread.

Read now:The future of successful coronavirus response: Mass testing at work and in church and self-administered tests

On Thursday, German Chancellor Angela Merkel said the country’s infection numbers were lower than two weeks ago and that Germany was now in a good position to reopen most of its economy. “We can afford a little audacity,” Merkel told reporters at a news conference, according to the New York Times.

The biggest nurses trade union in the U.S. is planning a protest later Thursday in which members will line up white shoes outside the White House in a criticism of its handling of the crisis, the Guardian reported. Many frontline workers were infected by their own patients because of a critical shortage of personal protective equipment, or PPE, the masks, gloves and gowns that medical workers need to be safe.

Latest tallies

There are now 3.78 million cases of COVID-19 worldwide and 264,406 people have died, according to data aggregated by Johns Hopkins University.

More than 1.2 million people have recovered.

The U.S. has the highest case toll at 1.23 million and the highest death toll at 73,566. Spain has the highest number of cases in Europe at 220,325 and 25,857 deaths. Italy has 214,457 cases and 29,684 deaths.

The U.K. has 202,359 cases and 30,150 deaths, the highest death toll in Europe.

Russia moved past France and Germany after another spike in cases overnight. Russia now has 177,160 cases and 1,625 deaths.

France has 174,224 cases and 25,812 deaths. Germany has 168,276 cases and 7,277 deaths. Turkey has 131,744 cases and 3,584 deaths, followed by Brazil with 126,611 cases and 8,605 deaths. Iran has 103,135 cases and 6,486 deaths. China, where the disease was first reported late last year, has 83,974 cases and 4,637 deaths.

What’s the economy saying?

In economic news, another 3.2 million Americans applied for jobless benefits last week, bringing the seven-week tally to 33 million, as MarketWatch’s Jeffry Bartash reported. The states of California, Texas, Georgia, Florida, and New York reported the biggest increases in new claims, according to the Labor Department. California, the largest U.S. state, has received the most jobless claims overall.

A separate report by large payroll processor ADP on Wednesday said more than 20 million jobs were eliminated in April, at least temporarily. The federal government’s official employment summary is expected to show a similarly large wipeout when it’s released Friday morning.

See now: Economic expert with perfect record calling recessions is betting this one will be over by the end of 2020

The federal government has sharply increased unemployment benefits, loosened eligibility standards and is effectively paying many companies to keep idled workers on payrolls until the crisis fades, but millions of jobs could be permanently lost as thousands of companies fail.

“That’s one in five jobs likely gone in seven weeks,” said Nick Bunker, director of economic research at Indeed Hiring Lab. “The outlook for the labor market remains frightening. Not only does the pace of layoffs remain at unprecedented levels, but hiring intentions remain depressed.”

What are companies saying?

The latest batch of earnings reports sparked some big stock moves, even as companies are not offering guidance given the uncertainty surrounding the pandemic and are still laying off or furloughing staff and raising cash to boost liquidity positions.

Lyft Inc.
US:LYFT
shares were last up 22%, after it reported better sales than expected for the first quarter. But the ride-sharing company, which has laid off 928 staffers and furloughed another 288, posted a loss of nearly $400 million, or $1.31 a share, due to a steep decline in ridership. The loss was wider than analysts expected.

“While the COVID-19 pandemic poses a formidable challenge to our business, we are prepared to weather this crisis,” Chief Executive Logan Green said. “We are responding to the pandemic with an aggressive cost-reduction plan that will give us an even leaner expense structure and allow us to emerge stronger.”

Payments companies PayPal Holdings Inc.
US:PYPL
and Square Inc.
US:SQ
had different quarters, with PayPal telling MarketWatch that April was “probably the strongest month for PayPal” since it became a standalone public company in mid-2015. Square the story is more complicated. The company benefited from digitally oriented services like the consumer-focused Cash App in the first quarter, but it’s taking time for Square to help transition merchants that traditionally relied on in-store sales over to online tools that can drive business during lockdowns.

For more, read: PayPal and Square see improvements in April, but Square has a longer road ahead

Peloton Interactive Inc. shares
US:PTON
soared 14% after it posted a 66% rise in quarterly sales, thanks to a surge in sales for its exercise bikes in the last few weeks of the quarter, as shelter-in-place orders kept people indoors. But losses also grew as the company faced unexpected costs, including for shipping its bikes amid an increase in overall shipping. Peloton lost $55.6 million, or 20 cents a share, up from $38.6 million a year ago. Analysts on average were expecting a loss of 18 cents a share, according to FactSet.

Higher expenses aren’t Peloton’s only issue with shipping. The company said that it is struggling to get orders to customers, and also expects that to continue, along with the temporary pause in sales of its treadmills.

For more, read:Peloton stock heads for record high after reporting surge in pandemic purchases

Mobile videogame publisher Zynga Inc.
US:ZNGA
posted a narrower loss and big jump in sales, also benefiting as Americans stay home. Chief Executive Frank Gibeau called it “a broad-based win” in a phone interview with MarketWatch before the results were announced.

Although Gibeau acknowledged the economy is in “totally unfamiliar territory,” he said a “tremendous number of people have been reactivated back into the habit of playing,” and predicted “a lot of the momentum from shelter-in-place playing will probably” show up in the second quarter.

That stock fell however, failing to capture the gains enjoyed by rivals Activision Blizzard Inc.
US:ATVI
and Electronic Arts Inc.
US:EA
earlier this week.

Elsewhere, retailers began to offer an update on store reopenings with most taking a very gradual approach. General Motors announced a bond offering, and Zoom Video Communications Inc. acquired Keybase, a secure messaging and file-share company. The deal “will accelerate Zoom’s plan to build end-to-end encryption that can reach current Zoom scalability,” the company said in a release.

Here’s the latest on what companies are saying about COVID-19:

• Bausch Health Companies Inc.
US:BHC
reported a wider net loss and a surprise decline in revenue given the negative effects of the pandemic. For 2020, the company lowered its revenue guidance range to $7.80 billion to $8.20 billion from $8.65 billion to $8.85 billion, which compares with the FactSet consensus of $8.40 billion.

• Apparel retailer Buckle Inc.’s
US:BKE
sales fell 81% in the fiscal month ending May 2 to $11.4 million, as the pandemic shuttered stores. For the first quarter ending on that day, sales were $115.4 million, down from $201.3 million from the previous year and below the FactSet consensus of $138.0 million. Online sales rose 31.5% to $32.1 million. During the week of April 26, Buckle began to reopen stores with 37 back in operation. Another 100 stores will reopen during the week of May 3. Due to the store closures, the company doesn’t plan to report same-store sales. First-quarter earnings are scheduled for May 22.

• Carvana Co.
US:CVNA
posted a wider-than-expected adjusted loss for the first quarter and sales fell short. The year was “off to a very strong start, and prior to the COVID-19 outbreak we were on track to meet or exceed our annual guidance on all key financial metrics,” the company said. Carvana has withdrawn its guidance.

• Dish Network Corp.
US:DISH
missed profit estimates for the first quarter, but revenue beat expectations. The satellite TV company, which is planning to launch a 5G wireless phone service, said the pandemic caused “severe disruption” in segments it serves, including the hospitality and airline industries. The company paused service or offered temporary rate relief to about 250,000 subscribers in the quarter. It ended the quarter with 11.32 million pay-TV subscribers. Net pay-TV subscribers declined by about 413,000 in the quarter.

• Etsy Inc.’s
US:ETSY
sales of face masks led to huge growth in April sales, but first-quarter earnings disappointed. The online crafts marketplace projected much bigger returns in the second quarter, thanks to sales of face masks by Etsy sellers. “After a volatile March, Etsy experienced a dramatic shift in demand during the month of April as global buyers turned to Etsy for cloth face masks given updated guidelines to slow the spread of COVID-19,” the company disclosed in its announcement, which said that gross merchandise sales jumped 130% in April after increasing 32.2% in the first quarter. Etsy forecast second-quarter revenue of $310 million to $340 million, which would be sales growth of up to 90% and trounces the analyst consensus for second-quarter sales of $213.5 million

• USA Today parent Gannett Co.
US:GCI
reported a first-quarter loss that widened and revenue that more than doubled, as a result of the New Media Investment Group Inc.’s acquisition of Gannett, which was completed in November. The company is suspending its dividend to preserve liquidity amid the economic disruption and uncertainties caused the COVID-19 health crisis. “The impact on our business from the pandemic came fast and is significant,” said Chief Executive Michael Reed. “We have also moved aggressively to manage through the current economic crisis by taking measures to preserve and increase liquidity and financial performance, including further cost reductions, limits on capital expenditures, and the suspension of our quarterly dividend.”

• Gap Inc.
US:GPS
plans to open 800 stores by the end of May, starting with select Texas locations this weekend. The store re-openings will be across the company’s portfolio of chains including Old Navy, Banana Republic and Athleta. “Ship from store” service will be available at 1,000 stores and curbside pickup at 75, with plans to expand those services. Stores will open with coronavirus-related measures, including signage to encourage social distancing, reduced hours, and a 24-hour quarantine on returns, such that items won’t return to the sales floor right away.

• Fitch Ratings downgraded General Motors Co.’s
US:GM
long-term issuer default rating to BBB-minus from BBB, putting it one notch above junk status. The rating agency also downgraded GM Financial’s IDR to BBB-minus, and said both ratings outlooks are stable. The move is based on the expectation that the auto giant’s credit profile will remain weak for a prolonged period, against the macroeconomic environment caused by the pandemic. “The company’s more concentrated operations, with its automotive FCF completely dependent on the North American and Chinese auto markets, could also pose some risk in the future, although it has resulted in less cash burn in the current environment.” GM’s ratings and stable outlook reflect the company’s strong liquidity position and the expectation that it will retain and investment-grade rating once the peak of the pandemic has passed.

• Hilton Worldwide Holdings Inc.’s
US:HLT
first-quarter adjusted profit beat expectations, but revenue fell shy of forecasts as the pandemic cratered occupancy and management and franchise fees. Revenue per available room (RevPAR) dropped 22.6% to $76.16, as occupancy fell 14.3% to 56.0%. “With the exception of the Asia Pacific region, Hilton’s first quarter results were not significantly impacted by the COVID-19 pandemic until March 2020, with occupancy roughly flat through February in the Americas and Europe, Middle East and Africa (EMEA) regions,” said Chief Executive Christopher Nassetta. Occupancy in Asia Pacific fell 27.6% to 38.1%.

• JetBlue Airways Corp.
US:JBLU
swung to a wider-than-expected loss on revenue that fell more than forecast, as the pandemic led to a significant drop in demand in March. The airline’s load factor fell to 69.8% from 82.5%, as traffic dropped 18.4% and capacity fell 3.5%; capacity in March alone fell 19%. JetBlue said it expects to reduce its daily cash burn to an average of just below $10 million a day in May from an average of $18 million in the second half of March, excluding the CARES Act support of about $5 million a day through the end of the third quarter.

• Kohl’s Corp.
US:KSS
opened stores across four states on Monday and will re-open doors to stores across an additional 10 states on May 11. Locations in Arkansas, Oklahoma, South Carolina, and Utah opened on May 4, with Texas, Alabama and Georgia among those to follow. A majority of stores in Florida and Tennessee will also open. Stores will operate from 11 a.m. to 7 p.m. with special shopping hours on Monday, Wednesday and Friday between 11 a.m. and noon for seniors, pregnant shoppers and those with underlying health issues. Limited-contact drive up service for online orders, launched in April, will continue. In addition to wellness checks and other provisions for workers, customers can expect the removal of in-aisle fixtures to create more space for customers and workers, a worker stationed at the door to sanitize carts after each use and limit entry to prevent overcrowding, and shuttered fitting rooms.

• Kontoor Brands Inc.
US:KTB,
owner of brands including Wrangler, Lee and Rock & Republic, posted a first-quarter loss and revenue that missed expectations. The company previously withdrew its 2020 guidance. Kontoor ended the quarter with $479 million in cash and equivalents and $1.4 billion in long-term debt. The company drew down its $475 million credit facility, has suspended its dividend, reduced management salaries and taken other financial measures in response to the COVID-19 outbreak. Kontoor says 85% of its business is done through the wholesale channel, with a material decline due to widespread store closures.

• Marriott Vacations Worldwide Corp.
US:VAC
provided a first-quarter profit outlook that was well above expectations, but said it was furloughing most of its staff, closing all sales centers through May and suspending its dividend in response to the pandemic. Contract sales were up 10% from a year ago for the quarter to March 13, but are expected to fall 13% for the full quarter. The company expects a net loss of $39 million to $114 million, including an impairment charge of $20 million to $100 million. Excluding nonrecurring items, the company expects an adjusted profit of $2.15 a share, above the FactSet consensus of $1.27. The actions the company is taking to reduce its cash spend in the face of the pandemic include furloughing nearly 65% of its staff, cutting executive salaries by 50%, reducing work weeks by 25%, deferring 401(k) matches and suspending dividend payments and stock repurchases.

• Royal Caribbean Cruises Ltd.
US:RCL
will extend its cancellation policy for cruises through April 2022, to give customers “peace of mind in vacation planning” amid concerns over the pandemic. The cruise operator’s “Cruise with Confidence” cancellation policy applies to existing cruise bookings and those made by Aug. 1, 2020. As part of the policy, customers can choose to change the price and promotional offer on their reservation up to 48 hours before the cruise.

• Shopify Inc.
US:SHOP
posted a surprise adjusted profit and said that gross merchandise volume accelerated in April from the first quarter. “While the COVID-19 pandemic has subdued commerce globally and especially strained small and medium-size businesses, it has accelerated the shift of purchase habits to e-commerce,” Shopify said. New initiatives include a 90-day free trial for new subscribers to its standard plan as well as curbside pickup and delivery options.

• Spirit Airlines Inc.
US:SAVE
reported a wider-than-expected adjusted quarterly loss and sales fell reflecting the virtual halt on air-travel demand amid the pandemic. Spirit said it was on track to meet or beat first-quarter guidance when the cancellations started to pour in mid-March.

• Tesla Inc.
US:TSLA
is preparing to resume some car production at its Fremont, Calif., factory within the next week, potentially in violation of local coronavirus rules, the San Francisco Chronicle reported. Citing an anonymous source familiar with factory operations, the Chronicle said a small number of employees returned to the plant Wednesday to start preparations to reopen some production lines between now and next week. Tesla did not immediately respond to a request for comment. California Gov. Gavin Newsom has said some manufacturing plants may soon reopen, but it was unclear if Tesla’s operations would be included. Alameda County authorities declared Tesla’s factory a non-essential business in March, shuttering it along with most other businesses in the San Francisco Bay Area. Tesla Chief Executive Elon Musk has been an outspoken critic of stay-at-home rules to stem the spread of the coronavirus, and Tesla defied the rules for about a week until the county sheriff intervened. The plant, which employs about 10,000 workers, has reportedly been staffed by a small number of “essential workers” since mid-March.

• Ulta Beauty Inc.
US:ULTA
will reopen about 180 locations in select states including Tennessee, Texas and Utah on Monday. Some locations will offer hair services, though customers and workers will wear face masks. Health care workers will be eligible for haircuts and styling services at half price for the first month of a store’s reopening. The beauty retailer has introduced curbside pickup at more than 700 stores. Among the other coronavirus-related measures, stores will have signage and limited capacity to aid in social distancing, and there will be no product testers.

• ViacomCBS Inc.
US:VIAC
posted stronger-than-expected earnings for the first quarter. The New York-based media and entertainment company’s ad revenue fell 19% from the year-earlier period. Affiliate revenue rose 1%, while domestic streaming and digital revenue rose 51% to $471 million. Content licensing revenue rose 9%, boosted by growth in original studio production for third parties. “Paramount Television Studios, CBS Television Studios and Cable Networks’ studios all benefited from strong content deliveries during the quarter,” the company said in a statement. Theatrical revenue fell 3% and publishing revenue rose 4%. The company raised $2.25 billion by selling bonds in April to bolster its liquidity position during the pandemic and has $3.5 billion in revolving credit capacity. The company has free cash flow of $305 million at the end of the first quarter and operating cash flow of $356 million.

• Vista Outdoor Inc.
US:VSTO
reported a first-quarter adjusted profit that beat expectations but revenue that missed and provided a downbeat second-quarter outlook. “Overall, the impact of the COVID-19 pandemic on our operations in the fourth quarter was minimal,” said Chief Executive Chris Metz. “We experienced stronger than expected demand in many of our categories, including commercial ammunition, bicycle helmets and accessories, and outdoor cooking.”

• Zoom Video Communications Inc.
US:ZM
acquired Keybase, a secure messaging and file-share company. Zoom Chief Executive Eric Yuan said the acquisition “significantly advances our 90-day plan to enhance our security efforts.” The company didn’t disclose financial terms in the release. Zoom has faced criticism in recent months for its privacy and encryption policies, and the company vowed to be more proactive about security issues on the video-conferencing platform.

New York City Schedules Nightly Subway System Shutdown to Combat Virus



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‘Would you risk your life for a jar of marmalade?’ My coronavirus survival guide to navigating grocery stores safely


NEW YORK — It’s not always easy to ask for help.

One of my best friends in New York is self-quarantining. She is smart, extremely well-read and makes me laugh. We read long-form articles together and, afterwards, we discuss them over tea. We don’t always agree, which we like, but we do agree most of the time, and we’re OK with that, too.

My friend remembers the AIDS crisis of the 1980s and 1990s, and witnessed people get up from a park bench if they thought a sick person sat next to them. She did not even get around to telling me about the many polio epidemics. Perspective is good: THIS IS NOT THE FIRST PANDEMIC. (That’s Point No. 1).

We take tap-dancing classes together (her idea). At least, we did until the social-distancing policies prescribed by public health officials came into effect. On Monday, we each vowed to practice 15 dance steps. That’s more “dig, brush, toe, heel, paddle and roll, paradiddle!” for me.

It’s good to be cautious, but it makes sense to be careful and take your time.

She listens carefully, tells me exactly how she feels, and remains open to changing her mind. I learn from her. Before tap-dancing class, she asks me, “So, Quentin, what color is your tutu today?” I usually describe the most ridiculous-sounding tutu. “Pink,” I say, “with yellow ruffles.”

My friend is 95, and she is now blind. Mostly, I feel grateful that we are both here at the same time, and that our paths crossed. She is one of my favorite people on the planet. She grew up in an Irish community in Massachusetts. I grew up in Dublin. She calls me “lace-curtain Irish.”

She needed a couple of weeks’ worth of groceries. That is how I found myself with another Irishman — who moved to the U.S. 30 years before I did — at the Fairway Market on Broadway and 74th Street on Monday afternoon, with a shopping list in one hand and a grocery cart in the other.

We’d been asked to help buy our friend groceries, so we joined forces. I didn’t like him usurping my place as Sir Edmund Hillary on this potentially hazardous expedition. (Nor did I want to be Francis Crozier to his Sir John Franklin.) But it’s a lot for one person to carry the load. We made a good team.

I wore a balaclava I’d bought for a New Year’s Eve midnight run in Central Park.

“If we get coronavirus, a grocery store is where we’ll get it!” I said, surveying the food aisles. He looked at me like I was about to rob a store, not shop in one. “What’s wrong?” I said. I was wearing a balaclava I’d bought for a New Year’s Eve midnight run in Central Park. He tried to muffle a laugh.

“Would you risk your life for a jar of marmalade?” I asked. He turned his head, as if to roll his eyes up to heaven, but then appeared to think better of it midroll. I presumed he was about to say, “You’re completely overreacting.” But he’s a gem, so he did a diplomatic 360-degree head roll, instead.

As for wearing a D.I.Y. mask, I could be wrong, I could be right, as the former Johnny Rotten sang. There are conflicting messages on whether a face mask other than the scarcely available medical-grade N95 helps. With so many people milling about, I decided to err on the side of caution.

Research has concluded that masks have helped reduce contagion by reducing droplets being sprayed into the air during flu season; and infectious-disease specialist Anthony Fauci has said the White House’s coronavirus task force is considering giving the public the green light to wear them.

N95 medical-grade masks help filter viruses larger than 0.1 micrometers.

N95 masks filter viruses larger than 0.1 micrometers (a micrometer, um, is one millionth of a meter). The coronavirus is 0.125 micrometer. Still, I would not wear an N95. They’re needed elsewhere. And if I am asymptomatic? If I can avoid passing on one droplet while reaching for the chicken giblets, I will.

Proponents of face masks also point to countries in East and Southeast Asia, including South Korea and Taiwan, which appear to have slowed the spread of the coronavirus more effectively than the U.S., Spain and Italy have. But they also have other safety measures, including early testing, in place.

I wore gloves because studies have found that shopping carts are traditionally covered in all kinds of germs, just like subway poles and turnstiles, or anything else that lots of people touch on a regular basis. I constantly lose my gloves, alas. But I have adopted a wartime thrift: I wear odd pairs with pride.

I did not bring alcohol wipes. Next time, I will at least bring Clorox

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wipes in a Ziploc bag. I tell myself every 15 minutes to wash my hands as soon as I get home both before and after I put the groceries away. “When you get home, Quentin, WASH YOUR HANDS.” (Point No. 2.)

Shopping carts are covered in all kinds of germs, just like subway poles.

Here’s the other reason I wore a ridiculous balaclava: It’s not comfortable, it reminds me that we’re dealing with a serious health emergency, it covers almost my entire head, and — here’s the science bit — I am constantly reminded: DO NOT TOUCH YOUR FACE. (That’s No. 3.)

If you take anything away from this, rather than becoming embroiled in a heated debate on face masks, take that. Coronavirus can survive longer on a solid surface than on a pair of gloves, but it can live for a time on different surfaces, so I try to be aware that it could be on my gloves, too.

Growing up in Ireland in the 1980s during the Troubles, and living in London during the 1990s, swanning around in a balaclava would have been a risky proposition, especially with an Irish accent. But during the 2020 coronavirus pandemic with my now transoceanic twang, I think I’ll be OK.

As an editor, I play devil’s advocate with my writers, push back and ask questions. It helps to be a little paranoid. I’m putting a life skill to good use. The coronavirus pandemic is a time when germaphobes (check), quirky paranoid types (check) and workaholics (check) come into their own.

I took my time, and I stayed 6 feet away from others whenever possible.

But here’s the other thing I learned during My Day at the Supermarket: Shopping can be stressful under these conditions. It’s good to be a cautious — and a smart — shopper. I usually want to get in and out in double-quick time, but I decided to be careful and take my time.

What’s more, I enjoyed it. Everything I could have done to minimize my chances of picking up COVID-19, I did. I stayed 6 feet away from others, whenever possible, including my shopping partner. We did not go at rush hour. I talked to staff and other customers.

Everyone is freaked out. Friendly banter puts me and, I hope, others at ease. A nice woman recommended the London broil. I read peer-reviewed studies — not Facebook

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 posts. I choose caremongering over scaremongering because FEAR IS NOT YOUR FRIEND. (Point No. 4.)

There is no evidence linking coronavirus transmission with food or food packaging. Juan Dumois, a pediatric infectious-diseases physician at Johns Hopkins All Children’s Hospital in St. Petersburg, Fla., suggests that viruses would survive better on “artificial fibers” such as plastic or polyester.

Viruses survive better on artificial fibers such as plastic, vinyl and polyester.

This, too, might help: Sarah Fortune, a professor who chairs the department of immunology and infectious diseases at the Harvard T.H. Chan School of Public Health, said that while health-care workers might have to worry about their clothes, we should not.

But here’s the deal: If you want to change clothes or wear a mask, do it. TRUST YOUR GUT. (Point No. 5.)

As my self-quarantining friend told me the other day on the phone, “Quentin, I’m 95! Do you think I’m scared of coronavirus?” But that doesn’t mean she’s standing in line at the supermarket, either.

If you are concerned about going to the grocery store, imagine what it’s like for those who work there. I told every staff member I spoke to at Fairway, “Thank you for working today.” They need to hear that. Customers must be frazzled, and a frazzled customer is often not a gentle or happy customer.

I also got something I couldn’t buy at any store or pharmacy. Getting out of the house for a couple of hours was a great tonic. I didn’t see Yoko Ono rummaging through the vegetables at Fairway — I did see her there once, and I left her to it — but I did meet another friend outside, from 6 feet away.

If you’re nervous about shopping, imagine what it’s like for the staff.

We had two weeks’ worth, maybe more, of groceries — including bottles, cans, six-packs of kitchen roll, liters of milk, jars of this, that and the other — and they were heavy. I walked one block, and we had a few more to go. I spotted an abandoned cart on the street corner. “We’ll return it,” I said. “Later!”

I quickly piled the groceries into the cart and pushed it across four traffic lanes on Broadway. We’re in the middle of a national emergency, after all; if the cops stopped me, I’d simply tell them the truth. Thank you, NYPD, first responders and health professionals, and thank you, Fairway Market.

As I headed down Amsterdam with the speed of a clanking, yet nutritious, bullet, a man ran out of a jewelry store in pursuit of another man. “People are dying, and you try to steal something from my store? You motherf—!” Ah, yes. There are always folks with bigger problems than mine.

It was a good day in Manhattan. To quote that opening line from the postwar film noir, “The Naked City”: “There are 8 million stories in the naked city. This has been one of them.” My 95-year-old friend would have been 23 when that film was released. She, too, has more stories to tell.

This essay is part of a MarketWatch series, ‘Dispatches from a pandemic.’

MarketWatch photo illustration/iStockphoto

Voices from around the world.



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