WATCH LIST
Welcome to the Year of the Rat.
Those born in this year of the Chinese zodiac will see career success, but health challenges, which unfortunately is apropos. This week’s column was going to explore Chinese stocks after the signing of phase one of the U.S.-China trade treaty, until (sadly) the coronavirus broke out in Wuhan, China and Chinese stocks opportunities became Coronavirus Stocks opportunities.
So, this time, we’re going in depth and looking at which stocks to consider–and avoid–during this health emergency. Have a look at our previous post for general market questions and answers about the Stock Market and the Coronavirus.
Biotechs to watch
Last week, biotechs soared, whether or not they had a direct link to the coronavirus.
Among the stocks that have a solid connection are little-known Inovio Pharma (INO on the Nasdaq) and Moderna (MRNA-Q) (which have scant analyst coverage). Both pharmas spiked after the Coalition for Epidemic Preparedness Innovations awarded them each US$9 million to develop a coronavirus vaccine.
Until then, both pharmas have struggled.
Inovio’s has a revenue growth YOY of -27.81%, a one-year total return of -15.37%, and a forward PE of -5.73x. With a market cap of US$424 million, Inovio pays no dividend. Its chart ain’t pretty either: since mid-2016, INO-Q has slid from nearly $11/share to around $3. True, Inovio has been researching infectious diseases, but currently doesn’t have an approved drug on the market. Moderna’s metrics and chart aren’t much better, saddled with a profit margin of -285%. In fact, its mid-week gains last week faded by Friday.
However, the coronavirus gives both companies pharma an opportunity to raise its fortunes and save lives, so let’s pray this happens to benefit shareholders and virus victims alike.
Then again, the coronavirus may be contained before anybody discovers a vaccine.
Vacation stocks head south
No surprise that leisure and vacation stocks have taken a beating during the outbreak, with an expected decrease of Chinese travels and travellers to the Middle Kingdom. It seems vacation stocks are the number one Coronavirus stocks opportunity.
Royal Caribbean Cruises (RCC) and rival Carnival both fell over 6% last week, while casino resorts, Wynn and MGM shed 7% and 5.6% respectively.
While the biotechs are more speculative, these stocks could be buying opportunities, especially with a long-term investment horizon.
The cruiselines are a safer bet.
Bay Street likes the aging demographic headwinds that are pushing RCC and Carnival higher.
Seniors like cruises, explains Jamie Murray. Bruce Murray adds that tourists from developing nations will also feed future demand. RCC recently matched its all-time high, and pays a 2.41% dividend, trading at 13.8x PE.
Carnival is the weaker of the two stocks; its chart is declining with lower lows and lower highs. That’s enough to keep technical analyst Keith Richards away. In fact, few on Bay Steet would buy Carnival.
One of the rare bulls is Brian Acker whose model price is an astonishing $98.36 and a bottom of $38.30 (Carnival closed at $45.27 on Jan. 27). Unlike RCC, Carnival failed to participate in the 2019 market rally. Carnival does pay a 4% dividend, but is it that enough to buy it on weakness? No, but RCC is.
In contrast, don’t gamble on the casinos.
Canadian analysts overlook MGM Resorts, while abroad it inspires six buy signals and three holds with a $37.25 price target.
One of the lone Bay St. bulls, Elliott Fishman, advises buying MGM on a pullback, which could mean right now. He forecasts a $40 target. MGM has fallen to $30.25. Analysts are less kind towards Wynn Resorts, whose founder and ex-CEO keeps receiving sexual harassment lawsuits. Its chart over the past year has been very choppy, though it did hit new highs right before the virus hit.
In contrast, MGM‘s chart has been less volatile and also hit a new high before the emergency. Both stocks pay modest dividends of 1.63% (MGM) and 2.83% (Wynn), so you wouldn’t be buying these for income.
Analyst Keith Richards avoids the entire gambling sector (slot machines are not “gaming”) because of its volatility.
However, if you are a believer in casinos, this may the time to roll the dice.
The Chinese giants
Even before Washington and Beijing announced in early-December 2019 that they would sign a trade deal, Alibaba was soaring towards its all-time high of $231.14, reached two weeks ago.
The Chinese Amazon boasts revenue growth of 40% YOY, a profit margin over 23%, and a one-year return of 37%. Darren Sissons and Mike Newton like this story, and expect the momentum to continue with a lot of runway ahead.
Other analysts, like Jeff Parent and Bruce Murray, don’t care for Chinese companies for various reasons, and stay away.
One reason is weak reporting standards.
Brett Girard notes that Chinese companies comply at only 70% with global standards, which is why he avoids stocks like Tencent.
In complete contrast, Kim Bolton sees a long runway ahead for Tencent in fintech and cloud storage that the company is investing in, as well as it continued dominance in online advertising and gambling.
Despite suffering Trump’s tariffs last year, Tencent boasts 34% revenue growth YOY, a 25% profit margin, and over a 14% one-year total return. If you believe in Chinese companies, these two are your best bets.
Good luck.
Read More about the Coronavirus and Stocks to buy on Pullback.
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