![]() ![]() Normally when a company’s P/E multiple expands, it’s because the market begins to understand that the business is getting better. Its growth prospects are accelerating, or its competitive edge is growing. Neither of these things is true with Kroger. On the contrary, Walmart, Costco, and other traditional retailers will continue to pressure Kroger with lower prices once this crisis has passed, and Amazon will continue to unleash its double-barreled can of whoop-ass-lower prices and greater convenience. (Photo by Luke Sharrett/Bloomberg via Getty Images) Packages of toilet paper sit on a pallet at a Kroger distribution center in Louisville, Ky. This principle is as unerring as the law of gravity-yet everyone forgets such laws in Chicken Little times like the one that prevails today. Investors dump securities that have long, deep, and growing profit streams because “this quarter’s going to be awful” or “it’s going to take a while for them to get back to a post-corona normal.” At the same time, they embrace businesses that are currently doing well but whose long-term future is bleak. In this frenzied environment, one cardinal rule of investing is especially pertinent: By definition, the value of a business today is simply the sum of its future profits discounted back to the present at an appropriate interest rate. Forget the technical, mathematical part of discounting back the profits-if you’re interested, you can read more about it in Buffett’s 1992 annual letter. The point is that a business’s value today is made up of a long string of profits extending out into the future. As anyone who’s ever done a discounted cash-flow analysis can tell you, the vast majority of a business’s present value-roughly 70% for many businesses-comes not from this year’s earnings, or next year’s, but from the earnings that should accrue over the decades. In a crisis like this, first-principle questions like these should be at the forefront of every investor’s mind. Yet it’s always amazing how, in times of crisis, people so quickly and utterly forget them. People panic, and they run around like chickens-or swans-with their heads cut off. It’s free to get it in your inbox.Ī view of the New York Stock Exchange on April 15, 2020. Subscribe to Outbreak, a daily newsletter roundup of stories on the coronavirus pandemic and its impact on global business. With the benefit of hindsight, it’s obvious that those crises were transient. But as anyone who lived through them, including me, can tell you, they felt anything but. Day by day the bear market ground slowly on-until it didn’t. The above questions are better ones to ask than the current ones being bandied about. “How long is the pandemic going to last?” and “When will the economy recover?” would be good questions if the answers were knowable. But the truth is, nobody knows! In this way it’s no different from past crises like 9/11 and the 2008–09 meltdown. What companies will not only survive but also prosper in a post-coronavirus world? These are the businesses I’m currently targeting, and these are the ones I think you should be too.What publicly traded companies can make it “to the other side” of the coronavirus? In other words, which companies’ business models won’t be completely destroyed by the bug-swan? Investors pondering this question should keep a company’s balance sheet in mind: Too much debt will drag a company down during hard times as surely as a swift current drags a weak mule downriver.To help you try to answer that, let me ask two slightly more specific questions. ![]() The black swan that killed the longest bull market in history arrived in the form of a bug, and it descended with such ferocity that the Dow Jones industrial average had its worst quarter since 1987, more than a generation ago. That crash was caused by technical factors and was largely a one-day event this crash comes thanks to a global stoppage of much of humankind’s economic activity. For precedent and parallels, we might look to 2000–2002, when we were hit by the double whammy of the dotcom crash and 9/11, and to the financial crisis of 2008–09. But it’s rather futile to search for analogs to the coronavirus crisis. Like any crisis, this one was unexpected, unplanned for, and largely unprecedented. That’s why we call it a crisis.įor investors, the operative question is simple, albeit very broad: In the midst of this crisis, what do we do? ![]()
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