These Stocks are Showing Strength During Market Chaos

For once, CNBC’s broadcasting of their Markets In Turmoil segment didn’t mark a short-term bottom. Put simply, a new infectious virus is spreading throughout the world, causing many economies to essentially halt. Italy, for example, has put their entire nation on shutdown, and the US federal government has announced several travel restrictions and government programs to alleviate some of the economic stresses associated with the virus.

Further, Saudi Arabia and Russia have waged an oil price war, causing the price oil to deteriorate nearly 44% since the February 20th short-term high. As a result, energy stocks have been under additional pressure, with the energy sector ETF (XLE) declining about 43% since February 20th.

Peak-to-trough, the S&P 500 is down about 26%, while crude oil is down roughly 47%. Some consider a bear market to be 20% peak-to-trough decline in indices, so under some models, we’ve already entered a bear market. However, we have to wait and see what the outcomes in terms of unemployment, GDP, etc. are.

With that said, almost every listed stock has significantly sold-off along with the market. Investors are keen to raise cash and are basically indiscriminately selling. There are few places to hide at the moment, but among them are a few stocks showing strength during this market panic. Keep in mind that this COVID-19 pandemic is riddled with uncertainty. Nobody knows where the market can go, but as we’ve learned, this market is capable of violent swings, so be extremely careful buying or shorting anything in this market.

In this article, we’ll be looking at a few stocks showing relative strength in amid this crash, all three of them trading above their 50-day moving averages.

Above is a weekly average of the NYSE Advance - Decline Index, which gives a net reading of how many stocks are advancing compared to declining. As the chart displays, the vast majority of listed issues are declining, with the index nearing historic lows.

Gilead Sciences (GILD)

Gilead Sciences is the one obvious safe haven at the moment. Their antiviral drug Remdesivir, which was originally developed for Ebola, has shown some promise in treating Coronavirus-related complications. The drug isn’t FDA-approved and is only being used “for compassionate care” at the moment, at special request to the FDA.

With Gilead being a US-based biotech giant, investors are staking hopes that not only will Remdesivir prove a success, but that Gilead will sell more drugs as hospitalizations increase.

Above is a chart of Gilead Sciences compared to the S&P 500 (orange) and the US healthcare ETF, XLV (purple). Gilead is one of a few S&P 500 components trading above it’s 50-day moving average.

With much of the market’s optimism priced-in and the high level of uncertainty regarding Remdesivir’s success, GILD still seems quite rich at these levels.

One has to keep in mind that during these periods of massive volatility, people rush into whichever assets seem like a safe haven. As the market gets a moment to breathe, it’s questionable whether Gilead’s rally will continue.

Zoom Technologies (ZM)

Zoom is showing enormous relative strength, showing a modest gain in stock price while the S&P 500 and the tech sector are cratering.

Zoom is a “work-from-home” stock, along with companies like Slack. As major employers like Google, Apple, Shopify, Microsoft Insitute work-from-home policies, remote workers are heavily utilizing Zoom’s video conferencing software as a replacement for meetings.

Since the market began to crash, Zoom has shot up 5%, showing tremendous relative strength against both the S&P 500 and tech sector, which have each declined roughly 25%, respectively. The stock, like Gilead and Kroger, is even trading well above it’s 50-day moving average.

It’s likely that Zoom will see a boost in sales if the COVID-19 pandemic continues to disrupt the global economy. Zoom is also quite financially healthy, which will become more important as several companies are bound to get their credit rating downgraded. Zoom’s current interest coverage ratio is 76, meaning they can cover their interest payments 76 times before running out of cash.

Companies with strong balance sheets are significantly outperforming those with weaker balance sheets, amid the market pricing in the possibility of credit rating downgrades, defaults, and bankruptcies to more vulnerable firms.

With that said, Zoom is trading at a P/E multiple north of 1,000, leaving its feasibility as a safe haven highly questionable.

Kroger

Kroger is America’s largest supermarket chain. Amid worries about the COVID-19 pandemic, one constant has been people stocking up on essentials. As such, Kroger’s earnings seem relatively safe in the face of extended social distancing. In densely populated areas like New York and California, some shoppers are having trouble finding essentials like toilet paper and bottled water, indicating grocery stores are experiencing such outsized demand that they’re having a difficult time keeping their shelves stocked.

As you can see, while the S&P 500 and consumer staples sector sold-off 19% and 26% respectively, Kroger has only declined a measly 2%. The stock is sitting right above it’s 50-day moving average, which is true of few other S&P 500 components.

According to Kroger’s recent earnings report, the supermarket giant has $393 million in cash, with an interest coverage ratio of 4, and levered free cash flow of $1.4B

Final Thoughts

This crash is unlike that of 2008, which was mostly caused by financial engineering and other idiosyncrasies. This time, the reason for the crash is straight up: there’s a deadly virus spreading, and that’s going to dramatically damage the global economy. This could be a 1-2 quarter slowdown, followed by a V-shaped recovery, or it can be something completely different. Nobody has a clue, a key reason that the VIX is at $75 at the time of writing. The main idea that I’d like to stress here, is to only trade with money that you can absolutely afford to lose.