Investing in companies less exposed to coronavirus
"Be fearful when others are greedy and greedy when others are fearful." So says investing legend Warren Buffett. There is no question where we stand today. The fear on the streets and in the markets is palpable. So is now the time to be greedy (and brave) and if so, how should you go about it?
Those of us who invested through the GFC, the dot com boom and bust and even the October 1987 crash, know that markets can plummet at an alarming rate and often fall far further than we would anticipate. However we also know that they always bounce back and those who had the courage, and the cash flow, to invest near the bottom usually make outsized returns.
But first two words of caution.
While the market is already down about 30% since its highs in late February and fell 10% on March 16 alone, it could still descend a lot further. It is early days in this crisis and it may well take six, 12, 18 months or more to play out.
Second, not all companies will survive so you need to choose wisely. It is quite conceivable that companies that sell discretionary products or services could see revenues fall to close to zero for a six-month period. If they don't have robust reserves they may struggle to get through.
No companies will be immune, but some companies are far less exposed than others.
It is with those companies, when they get caught up in the general panic and flight to safety, where opportunities lie. Often it is smaller companies that are ditched in a risk-off trade but whose underlying fundamentals remain sound.
One such company is Codan (ASX:CDA).
Codan derives the bulk of its revenue from metal detectors and communications equipment. The biggest market for metal detectors is prospectors in Africa but they are also sold for recreational and professional purposes throughout the world.
Some people might consider grabbing a metal detector and heading for the hills a good way to practice social distancing. Whilst for some they will be a discretionary purchase, for many they are an important tool for deriving an income.
Communications consists of high-tech radio equipment. These products are sold through large contracts mainly to government agencies and military customers. As such, demand for them is not likely to be impacted by the virus or even a recession.
The main risks to Codan from the virus are around supply chain and logistics.
Their manufacturing is distributed across nine locations worldwide, none of which are located in China. However virus hotspots are developing in many different countries. Secondly, they export products from those manufacturing hubs to markets all over the world. With more and more restrictions on travel it is quite likely there will be some disruption to their shipping.
The business has been growing very strongly in terms of sales and profits. Whilst it is likely that this will taper off in the short term, the company has net cash of $51m which should help them to ride through a short term slump.
Codan has been around for a long time, is very well run, and is likely to stay around well into the future. At some point the short term panic will become dislocated from the long term prospects. Those who identify that point correctly may strike gold.
The author's related parties have holdings in CDA
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