Each year, legendary investor Warren Buffet writes a long letter to shareholders of his company, Berkshire Hathaway.
Over the past few decades, Buffet’s collection of annual letters has become something of a “master’s course” on business, corporate culture, and investing.
Today, Buffet is worth more than $70 billion… all thanks to his ability to analyze businesses and investments. You can learn how he does his thing in his shareholder letters.
I typically avoid quoting Buffet simply because so many other people do it. You pay me to think differently than the herd.
But as I’ve watched the “Coronavirus Panic” play out over the past month, a line in Buffet’s famous 1986 shareholder letter keeps coming to mind…
In that letter, Buffet poetically described his approach as trying to be “greedy when others are fearful.”
Tens of billions of dollars in personal wealth… a reputation as the “best of the best”… all because of being “greedy when others are fearful.”
The source of Buffet’s extraordinary long-term returns and legendary reputation comes from the fact that he sees panic, fear, and plunging stock prices NOT as a reason to panic… but as a time to get greedy… as a time to buy assets from panicking sellers and get amazing investment deals.
During the “Great Financial Crisis” of 2008, when investors were in a panic and racing for the exits, Buffet put an enormous amount of money to work by lending to and investing in companies like Goldman Sachs and candy maker Mars. His actions during a time of “off the charts” public fear eventually produced more than $10 billion in profit for himself and shareholders.
These days, be “greedy when others are fearful” is one of the most repeated quotes in the financial world. It’s the investment equivalent of the “Golden Rule.”
As I write this, the level of investor fearfulness is at one of the highest levels you’ll ever see in your life.
The Dow Jones Industrial Average has plummeted more than 3% over the past five weeks. Stocks have suffered their largest one-day drop since 2008. Oil prices have collapsed. Countries are closing their borders to prevent the spread of the coronavirus. Sports leagues have suspended their seasons. (My season tickets for my beloved Philadelphia 76ers aren’t worth much right now.)
We see the words “panic,” “pandemic,” and “crisis” daily in media headlines.
I know it’s scary out there. I know the headlines are terrible. I know stocks are down big. But this is NOT the time to panic. Instead, I urge you to follow Warren Buffet’s advice… and see this time of extreme fear as a time of great opportunity.
To help you get started, let me share five large-cap stocks I see as strong buys at their newly discounted prices.
When the Ebola crisis hit in 2014, everyone was saying to sell the airlines because nobody wanted to fly. Everyone thought the crisis would crush the industry. I was co-hosting a show on Fox Business at the time, and I pointed out that airline stocks were at the cheapest they’d been in years.
United Airlines traded at $45.47 on October 1, 2014 – the day I made that comment. (You can watch the video here if you’re interested.) Less than four months later, it had climbed 61.9% while the Dow Jones U.S. Airlines Index had rallied 50.8%. The S&P 500 was up just 5.7%, which means that United Airlines outperformed by more than 10X.
The one sector that everyone thought would be destroyed by the Ebola breakout bounced back and was one of the best performers over that time.
Well, here we are again in 2020. Everyone is afraid to travel right now with the coronavirus, and we all understand why.
Airline carriers are once again suffering as they ground flights and see a massive decline in ticket purchases. But we know that people will resume business and leisure travel and be trotting around the globe again at some point.
That’s why the huge sell-off in The Boeing Company (BA) presents a great long-term buying opportunity – a time to be greedy amid extreme fear.
I’m sure you’re very familiar with Boeing. It’s the largest aerospace company in the world, and it’s the biggest manufacturing exporter in the United States. Boeing operates in the commercial aviation, defense, and global services market, which together are estimated to be worth $8.7 trillion in the next 10 years. That gives the company a massive total addressable market (TAM).
Boeing had stabilized much of the last year following a big hit early in 2019 after two tragic crashes of its 737 MAX aircraft led to the grounding and halted production of those planes. The company lost $3.47 per share for the year on revenue of $76.56 billion, both of which were down from 2018.
But in 2020, management is confident that things will pick back up. The company expects to again be profitable, with earnings projected to be $4.55 per share this year before climbing 270% to $16.81 in 2021. Revenue is estimated at $89.37 billion next year and $111.59 billion in 2021. That’s 46% sales growth in two years. I realize some of that may change, but the company should head in the right direction again when the coronavirus passes.
That’s what makes current prices a bargain. Boeing shares hit a high of $440.19 on March 1, 2019. They traded at $350 just a little over a month ago but have now fallen below $150. That’s a 60% hit in just a little over a month. A tough blow for sure, but one that doesn’t make sense. It’s emotional selling, and I see prices moving higher once things start getting back to normal.
Boeing brought in new business and expanded on previous partnerships in both its Defense and Global segments in 2019, and I am confident it will continue to capture new and follow-on contracts in the years ahead.
Most of all, people will start flying again. Maybe not tomorrow or even next month. But soon. Governments will also continue to spend on defense. The coronavirus doesn’t change that. Through it all, Boeing stands at the forefront of the industry to capture business and continue growing over the long term.
Here’s one economic and market truism for you: Low interest rates fuel home buying and mortgage refinancings.
It’s a simple idea. Low mortgage rates make houses more affordable. People can buy more home for their money, or they can buy that first home.
We’re already seeing a rush of refinancings as people take advantage of historically low interest rates. Lenders are having trouble keeping up.
We’ll see the same effect on home buying now that the Federal Reserve has brought the cost of borrowing money about as low as it can go. The average rate for a fixed 30-year mortgage recently hit an all-time low of 3.29%, which is way down from 4.3% last year at this time. They will probably hit new lows in the coming days after the emergency rate cut.
I fully expect – and history shows – that this will fuel a housing boom. I’ve already seen signs of it. I was out for a weekend walk recently and decided to stop in an open house. It was jammed with potential buyers. I happened to know the mortgage broker who was there, and he said his phone was ringing off the hook.
As you would expect, homebuilders do very well in a housing boom, and one of my favorites right now is D.R. Horton (DHI). This stock was a force before the coronavirus hit. It surged 83.5% in 2019 through its recent all-time high of $62.54 on February 18. It has dropped 50% since then, which is a major overreaction and a great buying opportunity.
D.R. Horton calls itself America’s Builder, and that seems to be a worthy title. It has built more homes than any other company in the United States since 2002. Nearly 9% of new home sales in 2019 went to D.R. Horton.
The company operates in 90 markets across 29 states through multiple brands, including D.R. Horton, Emerald Homes, Express Homes, and Freedom Homes. All different price ranges are covered, from $100,000 to more than $1 million. Two-thirds of homes sold last year were under $300,000.
The company reported earnings on January 27 and easily beat expectations as it earned $1.16 per share in the fiscal first quarter of 2020. That was way ahead of the consensus estimate for $0.92 and 52.6% above the year before. Revenue grew a solid 14% to $4 billion.
Guidance for the coming quarter and year will undoubtedly change, but we can be almost certain that low mortgage rates will be around a while. We can expect that to bring out more and more homebuyers. D.R. Horton was on solid footing before the coronavirus scare hit, and it is in strong position to benefit big-time once the scare is behind us.
I can’t tell you what the bottom price will be for the stock, but I expect share prices to again be a lot higher than they are now, which is why I consider D.R. Horton a good buy.
If there is one company that’s suffering directly from the coronavirus shutdown, it has to be The Walt Disney Company (DIS).
Disney was forced to close its theme parks around the globe until the virus is contained, and the sports world coming to a complete halt has affected its sports unit. The company then announced that its hotels and stores linked to the theme parks will close indefinitely, and to top it all off, production has stopped on its film projects.
That’s a perfect storm barreling down on Disney.
The one silver lining for the company may be its new Disney+ streaming service, which launched last November and has around 30 million users. That number could grow as people stay home and look for entertainment. Disney+ is trying to make the most of the situation by streaming Frozen 2 three months earlier than originally scheduled. The movie will now stream later this month instead of at the end of June to give families “some fun and joy during this challenging period.”
Most analysts have already lowered their guidance for the current quarter to the tune of 10%-15% from prior estimates. Current second-quarter projections are for revenue of $18.9 million on earnings of $1.17 per share. The latter would represent a sizable drop from the $1.61 earned a year ago. Revenue should still show sizable growth, up from $14.9 billion last year.
The stock has pulled back just about 40% from its November all-time high. Nobody knows for sure when the theme parks will reopen or when sports will get back to normal, so the stock could remain volatile a while longer.
This is another case of investors pricing in an absolute worst-case scenario, which means the selling is almost certainly overdone. We don’t know when things will get back to normal in the U.S. and abroad, but I am very confident that the U.S. will overcome the coronavirus. Just as importantly, I am confident we will come back even stronger than before.
Disney is an iconic brand that will rebound.
When things get back to normal, the complaints won’t be that your Disney vacation was cancelled – but that the lines are so darn long to get on the Matterhorn.
Major league sports will also be back. As a season ticket holder to the Philadelphia 76ers, I will be the first in line supporting my team when that happens.
And there is no doubt that Disney will roll out more blockbuster films in the future.
If you agree with me, then you know that Disney is a great long-term buy at these low prices. I believe it will be a $150 stock again, probably within the next 12-18 months.
Facebook (FB) needs no introduction. It is the world’s largest online social network, and at a time when governments around the globe are urging investors to practice “social distancing,” Facebook should be a great alternative.
The stock has lost about a third of its value since hitting an all-time high in January. In less than two months, it has come down to new 52-week lows. Along the way, Facebook has moved to what is now a very attractive valuation.
One key is that Facebook’s revenue comes from online advertising. Yes, there could be a dip in advertising in the near term as some companies conserve cash amid the uncertainty, but I expect that will be short lived. There is also the very real possibility that new clients will step up and replenish some of that lost advertising inventory.
In the end, there are only two online advertising platforms that are worth the money, and Facebook is one of them. (Google is the other.) Advertisements run on the company’s namesake Facebook platform as well as Instagram, WhatsApp, and Messenger.
More than 90% of revenue comes from advertising, which just so happens to be a really high-margin business. Facebook’s gross margins – or the percentage of net revenue left over after taking out direct costs – are over 80%. That’s a very high number for any industry, and it’s one reason why Facebook is worth more than $400 billion.
Looking at this year and beyond, Facebook is expected to continue growing at robust rates. Revenue is expected to increase nearly 40% from $85.4 billion this year to $118.4 billion by 2022. Over the same timeframe, earnings should jump from $9.24 per share to $12.92. Based on those 2022 estimates, the stock trades with a forward P/E of just 11.3.
That’s very attractive for a world leader in a high-growth industry. Facebook is a high-margin business with above-average growth, and its valuation is now cheaper than the overall market.
All of this makes Facebook a strong buy. As with every stock, I don’t know what the exact bottom will be, but Facebook could easily surge to $300 in the next 12-18 months.
I started my investing career at Charles Schwab (SCHW), and I have great respect for the innovations the man and the company brought to the industry, like lower fees and brokers paid salary rather than commission. Today, it is one of the country’s top financial services companies and, thanks to the planned acquisition of rival TD Ameritrade, it is developing a stranglehold on the industry.
Schwab currently has $3.9 trillion in client assets, 12.5 million active brokerage accounts, and more than $487 billion in proprietary mutual funds and exchange-traded funds (ETFs).
The $39 billion company started as Charles Schwab & Co. in 1973 as a discount stockbroker and publisher of a financial newsletter. It has grown leaps and bounds through the years in a cutthroat industry by keeping up with the latest tech, providing products customers want and need, and keeping those fees to a minimum.
In fact, the company helped lead the move in 2019 to make online stock, ETF, and options trades free. Today, that’s the industry standard.
It’s also helping drive new assets to the company in the midst of the coronavirus pandemic that’s rattled markets around the world. Schwab brought in $45.3 billion in core net new assets during the first two months of 2020 – the highest figure the company’s seen over the time period in its history.
And with all the current volatility, a ton of trades are being executed. On March 9, Schwab recorded a single-day record of 2.7 million trades. In February, the company averaged 1.3 million trades a day, up 53% from the year before. Likewise, the February figures for new accounts and new-to-retail households climbed 38% and 43%, respectively, over the prior year.
Schwab’s 2019 revenue of $10.7 billion was 6% higher than in 2018. Meanwhile, earnings rose 9% to $2.67 per share.
In other words, investors are still trading – more than ever in fact – and using Schwab to do so.
Not only are Schwab’s services in demand now, but the future also looks bright. The company has taken aggressive steps to grow through strategic tuck-in acquisitions. In July 2019, Schwab said it would acquire certain assets of USAA’s Investment Management Company for $1.8 billion. The deal is projected to add roughly 5% to Schwab’s asset base and 14% to its account base.
Then in November, the company rocked the industry by announcing plans to buy its biggest publicly traded rival, TD Ameritrade, for $26 billion. Combined, the company will manage $5 trillion in assets, 24 million brokerage accounts, and annualized revenue of nearly $16 billion. Its investment advisors will comprise about 40% of the market.
The deal is expected to close in the second half of 2020 and should be a major catalyst for the company’s stock going forward. One analyst estimates the deal will boost Schwab’s earnings 4.2% in the first year, 10.7% in the second, and up to 23.2% by the third year.
Analysts expect Schwab will earn $2.44 per share in 2020 and $2.50 in 2022, while revenue should climb from $10.3 billion in 2020 to $10.5 billion in 2022.
All of this makes the pullback from nearly $50 to current prices around $30 overdone… and a buying opportunity. The stock trades at just 12.5X this year’s expected earnings, and its forward price-to-sales ratio is only 3.98.
The stock is now a bargain, and a great opportunity to buy into the industry leader with a bright future.
The world is experiencing a health crisis right now.
At the same time, stocks are also experiencing a crisis.
But I deliberately called this special event the Crisis and Opportunity Investment Summit because crises produce opportunities. We may not know the exact timing of when the coronavirus will be under control, but I expect the economy and stocks to both recover in time.
A typical recovery cycle should look something like this:
Phase 1: Stocks take the gut punch and pull back.
Phase 2: Stocks move sideways for a few weeks/months.
Phase 3: Stimulus starts to take effect and stocks react, rallying big time.
Phase 4: We reach new highs.
I don’t know how long Phase 1 and Phase 2 will last.
What I do know is that the pain on Phases 1 and 2 can turn to Phase 3 quickly. That’s why you don’t want to sell, and history shows that buying good companies at these discounted prices could well be one of the smartest decisions you make. Every single time this type of dramatic sell-off has occurred, it has created a great long-term buying opportunity.
We’ll get through the coronavirus pandemic – like we have made it through other crises in history. What’s more, the economy was on solid footing before the virus hit, making the recovery likely to be stronger and faster.
Smart investors are already thinking ahead.
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