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COMMENT
Market Outlook If you have held good companies they are probably still doing well during the pandemic. You need to see companies that beat their cost of capital consistently, have a good balance sheet and can take on debt safely to build their business with good cash flow generation. COVID-19 has changed the way we look at businesses, with a move to more mobile strategies. The PE ratio of the market is in the top 10% of history, while the economy is in the bottom 10%. This is not like 2008. There will be unanticipated events in the world, so therefore most people should be cautious and patient rather than making big decisions in their portfolio right now. He thinks retail companies will suffer post-pandemic, especially smaller retailers. Oil and gas will also continue to suffer due to a slower growth in the economy. E-commerce companies will benefit.
HOLD
They have several business -- e-commerce, cloud, entertainment, online education and even groceries. Over 80% of their revenue comes from China. Probably the best way to play growth in China and the internet. They have AliPay, which is worth a lot of value to them. Given China and the US are at odds, they may have a hard time to grow internationally.
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HOLD
Post-pandemic? He does not own this -- he wishes he did. SHOP is in a sweet spot -- helping companies build their online presence. This will not slow down as companies will have to get to there in the future. The big issue for them is getting into logistics. This will be a big cost spend for them, but he does not think it changes the dynamic of their success. The trend to online shopping growth will continue.
COMMENT
US Bank stress testing? US banks may have a couple of difficult quarters. They are not expensive, trading at 10 times earnings and trading close to book value. They are well capitalized, and will not be allowed to increase their dividends. The big banks will get stronger as they can spend money on technology to make them more competitive and reduce their cost structure. The pandemic is pushing this move sooner. From a regulatory point of the view, the US Fed has done the right thing.
HOLD
The issue with BA comes down to the 737Max. Their dividend is 5.4% and trades at 13 times earnings. Will they be able to fly the Max again? The bigger issue is that the airline industry is in a depression. This may slow new orders drastically. They are fine from a liquidity perspective, he thinks, having drawn down bank lines. There are only two players for large aircraft builders, so that helps insulate them.
Transportation
PAST TOP PICK
(A Top Pick Jul 02/19, Up 1%) He still owns this and likes the defense sector. They have a $144 billion in back log orders and that will continue to grow. He thinks global defense spending will continue to grow. Aircraft and missile spending continues to grow. Operations a creating $23 billion of cash in the next three years. This allows for M&A and for dividend growth. It trades at 14 times earnings -- not expensive. Yield 3.2%
Transportation
PAST TOP PICK
(A Top Pick Jul 02/19, Up 10%) He continues to own this. It is really a toll booth -- they don't take on any credit risks, just the banks do. They have good organic growth and high teens earnings growth plus good cash flow. They use M&A and fintech to grow the business. The world is accelerating to a cashless society due to the pandemic.
other services
PAST TOP PICK
(A Top Pick Jul 02/19, Down 22%) He still owns this. A lot of their revenue comes from parks, although they are slowly reopening. On the media side, there has been a delay in new movie releases. Their streaming business has beaten all expectations. A tough story for this year, better next year. They cut the dividend quickly and he sees this as a good signal that management can make tough decisions when needed.
entertainment services
DON'T BUY
He does not own this one. It trades at about 0.6 times book value and has a great dividend. The market is telling you there are issues. Their sales methodology is a key concern. They are on the road to recovery. Retail banking will be tough as margins will be squeezed in a flat yield curve world. They also don't have the diversification of a larger global player. They are mostly a commercial retail bank. He doubts they will be able to grow organically like the other big US banks. Yield 7.8%
banks
BUY
He has recommended it for a long time. A great franchise, with a good yield, trades at 10 times earnings and only 0.8 times book value. A very cheap buy here. They are top ranked in investment banking and wealth management. A very strong franchise and conservative capital ratios. You can buy it here. He thinks it should trade at 1.5 times book. Yield 3.2%
banks
DON'T BUY
He is not a fan. It trades at 11 times earnings. He thinks they are late to the club to the cloud business. They have only been buying back shares, rather than demonstrating real business growth. The new CEO is more cloud-based, but it will take time. There are better opportunities out there.
Yield 5.6%
electrical
electronic
