These Shut-In Stocks Thrive Under Quarantine

“Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt.”

-William Shakespeare

The market movement has moved away from fundamentals, and even technical factors toward behavioral influence that some might say are akin to the suspension of disbelief. More succinctly, putting aside your doubts, which I should note, is different than putting aside any doubt.  

The market has confounded the experts who argue earnings are going to be annihilated. If you use the price-to-earnings (P/E) ratio as a key metric of value, then this market is extremely overvalued.

There is no doubt if stocks had to be priced based on the first half of 2020, earnings markets would be a lot lower. However, if priced on earnings in the first half of 2021, it would be a different story. And if priced for earnings growth (PEG) ratio next year, then it would be an entirely different story altogether. 

Many investors that base equity allocation on earnings growth don’t seem to be able to look beyond the gulf doom - that is, earnings for the first half of this year. There is always room for doubt, but it probably shouldn’t be the fallback position when it comes to assumptions about Americans and the economy. Those doubts also must be adjusted from all the stimuli being poured into the economy. While it will create issues down the road, the goal of staving off immediate doom with gobs of cash is working.

And while the usual suspects still garner the lion share of cash, the notion of building a bridge to better times seems to be coming to fruition. That said, the small bank payroll protection plan continues to leave a lot to be desired. I’m hoping it gets on track very soon.

Meanwhile, investors aren’t being asked to suspend their disbelief on the same level it takes to enjoy an X-Men movie. However, overlooking near-term carnage by assuming a brighter tomorrow might be the ticket.

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The Message of the Market

The market breadth was disappointing even for NASDAQ, which finished the session higher. The overall volume was extremely light. Many investors were mostly hanging back waiting for the wave of earnings releases.

Shut-in Winners

As for the NASDAQ, it was powered by coronavirus winners, including video conferencing, Zoom Video Communications (ZM) (Zoom regained its footing), gaming stocks, and streaming services provided from Netflix (NFLX). 

The trend continued after the close with the first-quarter release from Roku (ROKU). 

• Management sees revenue as $317 million compared to the Street’s $300 million
• 39.8 million active users, +3 million since December 31, 2019
• Streaming hours: 13.2 billion +49% year-over-year.

Technical View

The NASDAQ Composite is edging toward a monumental breakout at 8,350, then sees a potential next leg higher to 9,000.

Opening the Economy

Yesterday, Governor Cuomo and his counterparts from New Jersey, Connecticut, Delaware, Rhode Island, and Pennsylvania announced the formation of a committee to form a strategy to reopen the economy in the region.

Each state will provide the following:

• Public health official
• Economic development representative
• Chief of staff of the governor

The states are at different stages of flattening the curve, with respect to hospitalizations and other key metrics, but they want to have a unified approach. Yesterday, later in the day, the governor of California also said he was linking up with Oregon and Washington states for a coordinated game plan.

I have no problem with states trying to find solutions to turning the wheels of commerce back on, although I get a kick out of how many elected officials are wrapping themselves in the flag of federalism. 

Portfolio Approach

Today's Session

Earnings season has begun, and thus far, it looks like investors are looking at the ability to maintain dividends and pay other expenses as the key test this morning, Revenue and earnings aren’t a big deal, as consensus is largely a collective guessing game and guidance will be limited for every company posting results.

JP Morgan (JPM)

Key headline is $6 billion in additional loan loss provisions bringing total to $8.3 billion from a little more than $1 billion a year ago.  There were positive highlights including:

Record $7.2 billion trading

• $5.5 billion bond trading
• $2.0 billion equity trading

Assets up 7% to $2.2 trillion

Johnson & Johnson (JNJ)

$20.7 billion in revenue +3.3% and earnings $2.30 up 9.5%.  Management announced it was hiking dividend by 6.3%.  More importantly, the company believes it will have a vaccine in early 2021.

Wells Fargo (WFC)

Loan loss provision of $4.0 billion is twice consensus but company has 121% liquidity reserve ratio.

Technical View

Don’t look now, but the 50-day moving average is back in play.  This is hard to believe considering the rate the market was plunging in March.  Now investors, especially those that manage money for a living, have to pay attention to the magnetic pull of this most favored metric.

• S&P 500 2,900
• Dow Jones Industrial Average 24,950
• NASDAQ Composite 8,431

Also, in play:

• Airlines after comments from Mnuchin at yesterday’s briefing 
• Momentum names as more investors return to the market looking for fast trades

The biggest topic around the world is reopening society and economies.  Norway and Austria are slowly returning and reports say the Italy government is under pressure to turn the economy back on. 

To see the chart, click here.