What a difference four months makes.
It was around this date in January that reports of a viral outbreak in China started to make the news here in Australia. And even then, we didn’t know what havoc we were in for.
Just over a month later – on February 20 – the ASX 200 hit its high (so far, at least) for the year. From that point, the index gave up 37% of its value, falling from over 7,160 points to 4,546 by its mid-March nadir.
There has been some sort of recovery since – with shares up around 18% from those lows – but we’re still well and truly underwater.
That’s at a total market level, of course. Companies such as Flight Centre, Webjet and Qantas have fared even worse, and poor old Virgin is trying to battle its way out of administration. Retailers such as Myer (about half of its 2020 high) and Kathmandu (down by more than half) copped a hammering, too.
The companies that are winning
But the news isn’t all bad. At least not if you’re the right company, in the right space.
Take Kogan for example (and I own shares, for full disclosure). While it fell 26% between February 20 and mid-March, the shares are now up by more than 125% since that low, and more than 50% above pre-crisis levels.
Why? It seems that investors, originally fretting that economic damage would be severe, widespread and indiscriminate, sold first and asked questions later. In the event, Kogan’s sales were up by almost 40% in March and doubled in April, as consumers took their spending habits (even more) online. And remember, when you’re only a relatively small player, with a compelling offering, you can still grow, even as your industry contracts. That seems to be what Kogan is doing – and shareholders have benefitted nicely.
A similar share price story – but for very different reasons – is that of biotechnology hopeful Mesoblast. Having fallen 60% from peak to coronavirus-trough, the shares have gained a phenomenal 200%, tripling in little more than a month as investors (speculators?) bet that the company’s COVID-19 treatment might yet become a key component of the medical response, and rain cash on the business. Time will tell, and the share price remains volatile. It wouldn’t be the first time investor hopes for Mesoblast have been dashed, but hope springs eternal.
Perhaps the most impressive story belongs to the (ahem) “story stock” du jour, Afterpay. Long-term investors would be used to volatility from Afterpay, with the share price being as low as $12 and as high as $36 last year. But that was just the entree. Pre-crisis, Afterpay shares changed hands for over $40. Almost a month later, to the day, you could pick up Afterpay for less than $9 – a fall of more than 75%. Again, as with Kogan, investors seemed to decide that the pandemic, and its economic fallout, would be hugely detrimental to the buy-now-pay-later leader. Until… well, until the pall lifted.
And “lifted” is a heck of an understatement. The share price had more than doubled just three days later. And it kept climbing. Overall, shares were up 380% in less than two months, and as late as last week were trading higher than they did before we knew what “social distancing” meant!
It’s worth noting that during the same time, despite our new fetish for stockpiling flour, rice and toilet paper, both Woolworths and Coles shares are lower than they were toward the end of February. If you’re struggling to square that circle you’re not alone.
Afterpay’s recovery is partly due to the return of (selective) optimism to the ASX. And perhaps it will gain from the increase in online shopping (though will also lose out, in the medium term, from the fall in bricks-and-mortar retail). But it was also meaningfully helped by news of an investment into the company by Chinese ecommerce behemoth Tencent. Not only does it validate Afterpay’s plans, but investors are betting on the potential for the company’s buy-now-pay-later offering to be boosted by a commercial tie up on some of Tencent’s platforms, too.
Of course, the job of the investor is to look forward, not back. And we’re in an interesting period right now. Have investors backed the right horses, or is the optimism misplaced? And are those left behind offering value, or have they been correctly discarded? The future is never clear, but with such uncertainty around both the health and economic outcomes, trying to correctly discern the outlook for companies whose futures are intrinsically linked to the timing and speed of the recovery is fraught.
While it’s not as exciting (or financially impactful – for good or ill!), I think the best course of action is to “look through” the current circumstances. First, will the company survive an extended downturn? If it will, look forward four or five years, and ask yourself what level of profitability you expect. If today’s price is attractive, relative to that future – and you can cope with the volatility between now and then – you’ve probably got yourself a winning investment, coronavirus or not.
About Scott Phillips
Scott Phillips is Chief Investment Officer at The Motley Fool and runs the Motley Fool Share Advisor, Million Dollar Portfolio and Everlasting Income services. Scott holds a Bachelor of Commerce, a Graduate Diploma in Accounting.
Main image source: Pixel-Shot (Shutterstock)