Coronavirus Opportunity and Risk: Tech, Telecom, and Financials Stocks
Our analysts discuss where they see value in their sectors today.
|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
Coronavirus fears have pummeled U.S. stocks. The market lost more than 11% last week, and despite a notable comeback on Monday and a surprise 50-basis-point interest-rate cut on Tuesday, stocks haven’t yet found reason enough to stabilize.
In which sectors and among which stocks are coronavirus fears perhaps overdone? And as a result, where might investors find opportunity?
We asked our sector directors to share what impact the coronavirus outbreak may have on their particular pockets of the market and which stocks look like good opportunities after the sell-off.
Here’s what our technology, media and telecommunications, and financial services specialists had to say. See what our healthcare and consumer directors think, as well as thoughts from our industrials, energy, and basic materials teams.
Technology: Brian Colello
We think there are several technology stocks where the damage from the coronavirus outbreak might be limited. Some of these stocks are undervalued today; some aren’t. Zoom (ZOOM) is countercyclical to coronavirus and has done quite well during the sell-off; it’s probably our best example of a stock that actually benefits from the virus but is expensive.
Software has generally very low exposure to China from a direct demand perspective. After a four-month run, software stocks were fairly expensive, so the reset is a nice opportunity to buy some really great companies. ServiceNow (NOW), Salesforce (CRM), Tyler Technologies (TYL), and Microsoft (MSFT) have long been among our favorites and are all trading below or near our fair value estimates. Revenue exposure to China is probably less than 10%, and even this estimate might be conservative. After this big sell-off, we suggest focusing on the best names in the space, including the aforementioned wide-moat names.
Autodesk’s (ADSK) sales aren’t just tied to construction; media, entertainment, and gaming help to diversify. Subscription terms don’t make it easy to just drop seats. A whole business wouldn’t temporarily omit subscriptions even if up for renewal, given the loss of very important data. Also helping to moderate the headwinds in Asia are rapid hospital builds using prefab modular design, which probably runs on Autodesk software, which is seen as a leader in modular efficient construction. Additionally, urban planners are using Autodesk software to contain the virus from a geographic and infrastructure perspective.
Intuit (INTU) shouldn’t be affected by the outbreak. Of its revenue, 41% comes from the consumer business, which is nearly all derived from the United States, thanks to TurboTax. Little QuickBooks revenue comes from China. The most realistic obstacle we see for Intuit is if small businesses that rely on drop shipping (ordering products from China and having them directly sent to customers) were significantly hurt by the virus and shut down. Still, we do not expect drop shippers to make up a significant portion of QuickBooks’ small-business base, leaving Intuit fairly immune from effects of the virus.
Citrix Systems (CTXS) is more of an enterprise strategic decision type of solution, so it is not something companies can quickly pivot to. The company also sells some physical networking products, which are undoubtedly made in China. But we think Citrix would theoretically benefit from a prolonged virus outbreak.
A few tech stocks would stand to benefit from more people working remotely, Okta (OKTA) (identity and access protection and management) and CrowdStrike (CRWD) (endpoint security) among them. As more remote working occurs, the number of people and devices needing protection increases and the companies’ solutions are more easily spread across workforces versus legacy solutions that are losing share. Their cloud-based deployment models make it a lot simpler to add seats/licenses, and more remote-based working requires protection outside of a core firewalled perimeter.
Slack (WORK) benefits from a remote worker theme as well and could theoretically benefit from a prolonged virus outbreak.
Analysts Dan Romanoff, Julie Bhusal Sharma, and Mark Cash also contributed.
Media and Telecommunications: Michael Hodel
The big U.S. telecommunications companies (AT&T (T) and Verizon (VZ)) have been a relative safe haven during the turbulence, as the stocks didn’t move much and are sitting just below our fair value estimates.
Disney (DIS) is a stock that we think is interesting. The shares have gone from $134 per share to $118 versus our $141 fair value estimate. The company has coronavirus exposure through parks in Shanghai, Tokyo, and Hong Kong; U.S. and Paris parks could also be at risk. Movie theaters in China have also shut down. But the core studios’ ability to churn out franchise titles isn’t affected by coronavirus, and Disney+ is doing great. The parks should be fine over the medium term, and some portion of lost sales will be made up as a portion of pent-up demand will be satisfied--for instance, families who want to take one or two visits to the parks could defer rather than cancel plans.
A few other stocks that we like that have gotten more attractive during the downturn.
Comcast (CMCSA) has a Universal theme park in Tokyo, but this generates a very small percentage of overall sales. It is building in Beijing, but that park won’t open for more than a year anyway. U.S. parks could be at risk, but they are also a very small percentage of total sales. There is no exposure of note in the core cable business, which still generates 70% of sales, or in the core of NBCUniversal or Sky.
CenturyLink (CTL) is among our Best Ideas. It’s a phone company with no meaningful exposure.
Latin American telecom America Movil (AMX) has no direct business exposure beyond general economic weakness. Economic weakness could slow the rate of smartphone and Internet access adoption, but probably only modestly based on what we’ve seen through periods of economic instability in the region over the past decade.
Financial Services: Michael Wong
There aren’t many undervalued stocks in the financial sector that are immune to coronavirus. The financial exchanges and financial data companies’ revenue should be relatively immune. Higher market volatility will boost trading volume, and market data is an essential purchase for many financial services companies. However, we believe these companies are overvalued.
We estimate that the other financial industries should have average to above-average sensitivity to the secondary effects of coronavirus. Asset- and wealth-management companies whose revenue depends on client asset levels will take a hit along with the decline in the stock market. Long-term interest rates (such as the 10-year Treasury) and short-term interest rates (such as the federal-funds rate, which was just cut 50 basis points) will negatively affect interest-rate-sensitive names, such as banks and retail brokerages. Shaken economic confidence or a recession will lead to lower loan growth, higher loan charge-offs, and lower investment banking revenue. The effect on insurers is also probably negative, as their investment income is lowered and unusual liabilities could emerge associated with health issues in the population and business disruption.
Some of the real estate companies that we cover are undervalued, but they may have larger concerns that layer on top of coronavirus. Retail real estate investment trusts like Macerich (MAC) and Simon Property Group (SPG) are some of our most undervalued real estate names. Discretionary consumer spending may take a hit from coronavirus, as people avoid crowded areas, or from a potential recession. However, the larger concern that we believe the market has more than priced into many retail REIT stocks is the shift in consumer spending to e-commerce from brick and mortar. Hotel REITs, such as Pebblebrook Hotel Trust (PEB) and Park Hotels & Resorts (PK), also appear undervalued, but travel-related stocks are squarely in the headlines for coronavirus and hotels are highly sensitive to the economic cycle. Office REITs such as SL Green Realty (SLG), Vornado Realty (VNO), and Empire State Realty Trust (ESRT) aren’t trading at as deep of a discount to our fair value estimates (around 20%) as the retail and hotel REITs, but they also aren’t as directly affected by coronavirus and may be worth a look.
Kevin Brown and Yousuf Hafuda also contributed.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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