It's not what happens. It's how you react to what happens. That's the story of the market of stocks we talk about every day, NOT the stock market, and it is why it continues to confuse and confound more casual observers or people who don't have a sense of stock history, the history of stocks before they became part of gigantic baskets.
The onslaught of the coronavirus has been nothing short of catastrophic for mankind, but it has had a sobering, clinical impact on stocks. I know we would prefer to tie the averages to the illness and its aftermath, like the 22 million people who are now unemployed, wiping out all of the job gains since the bottom of the Great Recession. We would expect to see the averages behave, express some sympathy, or at least some empathy to reality. That's not going to happen either.
What's happening is nothing short of the complete unraveling of not only Main Street from Wall Street but the little publicly traded companies from the big ones.
Let me explain.
The stock market's now divided into three buckets:
The first bucket is companies that are big enough with big balance sheets that can ride this out, no matter how long it lasts, and are therefore investible when their stocks come down hard off of bad news such as the potentially fake news we got out of China that remdesivir, the Gilead Sciences (GILD) anti-viral, doesn't work. The word out of the U.S. hospitals I know is quite positive about the drug, but, as always both the mainstream media and the intelligentsia would rather trust a shoddy Chinese study than the rigorous ones we conduct.
Second bucket: the companies that have been able to think on their feet and come up with solutions that suit the time and allows them to actually profit from it. These companies, too, have good balance sheets, but more importantly, they are inventive, clever and make sense in this particular environment more than ever.
Third bucket: those companies that require credit and need demand that they don't have and aren't big enough to impact the averages but do represent the pain that so many people feel and trade accordingly.
Let's start with the first bucket. Earlier this week IBM (IBM) reported and I told you, after interviewing brand new CEO, Arvind Krishna, that I liked his strategy of growth, not just earnings per share, yet with a commitment to a very large dividend. Krishna's plan is for a hybrid cloud, a fantastic idea now that he has brought on Red Hat -- his idea -- to help convert customers that might otherwise go entirely to Google Cloud Services, Microsoft's (MSFT) Azure or Amazon Web Services. There's enough room for everyone, especially for those who are worried about cyber-theft and need encryption, IBM's specialty. IBM has always valued client data, a great legacy of previous CEO Ginni Rometty, and, the combination with Red Hat has created a faster-growing, smarter IBM.
What happens? The company reports a good quarter, the stock gets clobbered, and I just say buy it because the balance sheet is strong and business is fine. Now you are up six quick bucks.
Or how about Union Pacific (UNP) ? The revenues were weak, the cargos, with the exception of grain going to China and beer, were unexceptional, let's say weak at best. But the company has done a remarkable job taking costs out and becoming so efficient that even with so-so revenues, accentuated by a collapse in coal, it's crushing the earnings and will continue to do so even if we get a slow recovery. The company's financial situation is so strong that it made a point of a commitment to the dividend.
Next bucket? The companies that are pretty much made for this moment, and I am talking about companies that are just thriving because of what they do in a pandemic or have a chance to just crush everyone else in their business. Amazon (AMZN) , Walmart (WMT) , Costco (COST) and, as we saw today with its incredible digital numbers, Target (TGT) , are actually about to carve up the entire retail market. There are 43 million people involved in retail. We are in a service economy. But we are in an economy where companies with scale can get products much cheaper than other companies. They can sell them more cheaply. And those who had the foresight to add food into their mix are now in charge. Brian Cornell Thursday morning told CNBC, "In April alone our digital growth is up over 275%. We've just seen cyber Monday occur almost every day but the volume is twice the size of a normal cyber Monday" How many retailers can say that?
Who else is made for this moment? Kimberly-Clark (KMB) and Procter & Gamble (PG) because when you stay at home you use their products much more. Some of them are being hoarded for heaven's sake. Hormel (HRL) , Smucker (SJM) , General Mills (GIS) , Mondelez (MDLZ) , these are crushing it. So is McCormick (MKC) . Oh and if you are going stir crazy? Then you go to Chipotle CMG, with its digital pick-ups, deliveries and Chipotlanes.
Then there are the companies that do well in work from home: Zoom (ZM) . Ring Central (RNG) , Zscaler (ZS) , Okta (OKTA) , CrowdStrike (CRWD) , all come to mind. Finally, there are the companies that are involved with the data centers, everything from Microsoft's Azure, to Amazon Web Services, to Alphabet (GOOGL) and to Nvidia (NVDA) and Advanced Micro Devices (AMD) . And then there are the companies that benefit from the play at home cohort: the video-game makers and the companies that deliver, including Domino's (DPZ) , which is on Mad Money Thursday night.
Then there's the unfortunate third bucket, made up of all of the companies that need bailouts, that are closing their doors, that are nearing bankruptcies because they need credit and can't get it, or have given credit and now are worried to be paid back. The banks are in this leaky bucket, which is a reason why fintech is back in action as the mutual funds that mimic the S&P are selling the real banks and going for the PayPals (PYPL) of the world.
It's this third bucket that trades with the unemployment number. It's the one that reflects the 22 million. In many ways these are like the smaller companies that are trying to get dollars from the Payroll Protection Program that's getting re-funded now by Congress. In some cases, we actually had publicly traded companies take that money, which was meant for small companies. Shameful. Oils are in this bucket. Airlines define the bucket. Travel and leisure lives in the bucket.
Now the problem the index fund owners have is that they own all three buckets and there are a lot more companies in the third bucket than in the first two. They are going to do better than the small- and medium-sized businesses that are fighting for their lives. I think in many cases both the smaller companies in the S&P and the small and medium-sized privately held companies are doomed because we don't have a vaccine that eliminates social distancing and these places need crowds, crowded stores, crowded restaurants, crowded roads to survive.
You want to make money in the era of Covid-19 -- you have to be in the second bucket, you can buy stocks in the first bucket on a market decline and the third bucket? That's the unfortunate part of the market, the part that must be avoided and abandoned on any lift like we got today and in the morning of today's interminable session.