We are smack dab in the middle of a fear-driven roller coaster. Each day we gasp as the car screams toward the ground, then rejoice once we think the ride is over. The problem is, we really don't know when that will be. Yesterday's carnage is followed by today's uptick in the futures market, and investors breathe a little bit easier, for now.
I, for one, still believe that the virus itself is overblown, however, it is not the virus that is causing the damage, it's the fear of the virus. That's what causes consumers to cancel travel plans, avoid eating out, or to stockpile toilet paper and bottled water. That's what needs to be contained before we move forward.
Since February 20th, a total of 12 trading days, the S&P 500 has fallen 18.5%, eclipsing the 15.7% December 4 to December 24, 2019 drawdown. The S&P 500 now trades where it was this past June, which puts the drop into perspective. Essentially, nine months of gains have been wiped out. That in and of itself is not all that concerning, it's the short number of trading days it took that is. The S&P 500 is down 14.7% for the year.
The drop in smaller names since 2/20 has been smaller than I would have imagined under the circumstances with the Russell 2000 Index and Russell Microcap Index down 22.5% and 21.8%, respectively. Still, that puts both in bear market territory.
Carnage in cruise lines and restaurants, the sectors I am watching most closely at this point, was severe on Monday. Norwegian (NCLH) (-27%), Royal Caribbean (RCL) (-26%), and Carnival (CCL) (-20%) were crushed due to cruise related travel warnings. With the drops, RCL now yields 6.5% and CCL yields a whopping 9.2 %.
Restaurants also received brutal treatment. Dave & Buster's (PLAY) (-21%), Red Robin (RRGB) (-19.5%), Brinker (EAT) (-18%), Dine Brands Global (DIN) (-17%), Bloomin' Brands (BLMN) (-15%), and Jack In The Box (JACK) (-15%) seemingly got the worst of it.
The big question is whether this is a buying opportunity, and I am still not there yet. I want to own some of the above names, most notably RCL, BLMN, and DIN (which I parted ways with in recent months) but am not yet convinced I would be getting a bargain at these levels because the dust has not yet settled.
BLMN now trades at 6.5x next year's consensus estimates, and yields 5.9% (given the recent dividend increase to 20 cents/quarter), while RCL and DIN trade at 4x and 8x next year's consensus, respectively. The problem I have with buying now is twofold. First, I can't trust the "E" (earnings) in forward PE ratios because the consensus estimates may not reflect reality if fear continues and consumers indeed stay away. Second, prices may fall further. Take RCL, for instance. On February 20th, it was a $110 stock. It may have looked "cheap" on February 26th at $81, but just days later om March 5th, it was a $65 stock. That may have looked pretty good, but yesterday it closed at $48. You can never say never in these situations.
I just don't have confidence in calling a bottom in any of these names when I can't trust the "E", when the fear is as thick as pea soup, and these names don't yet qualify as "stupid cheap".
