Pathogens and Profits: Coronavirus Takes Its Toll

As befits this era of fake news and paranoid politics, a conspiracy theory is making the rounds in the media that Beijing manufactured the coronavirus as a bioweapon and the pathogen either escaped accidentally or was purposely released to cull the Chinese population. Some influential people believe this. I kid you not.

Here’s some real news about the virus: it’s a serious threat to future corporate earnings. To obtain this insight, you don’t need to wear a tin foil hat. Simply review the remarks of corporate managers on this season’s earnings calls.

During each earnings season, companies typically comment on topics that affect earnings and revenues in the latest quarter or in future quarters. During the latest quarterly earnings calls, managers are attesting to the adverse effects of the coronavirus on operating results.

Research firm FactSet (the data provider for Investing Daily) in recent days initiated a study of the causal link between lower earnings guidance and the coronavirus. FactSet searched for the term “coronavirus” in the conference call transcripts of the 364 S&P 500 companies that conducted fourth-quarter earnings conference calls from January 1 through February 13.

Among these 364 companies, 138 (38%) cited the term “coronavirus” during the call. At the sector level, the industrials (26), information technology (26), and health care (24) sectors have witnessed the highest number of companies discussing coronavirus as a threat to revenues and profits. The following chart tells the story:

For the 138 companies that discussed the coronavirus on their earnings calls for Q4, the average revenue exposure to China is 7.2%. For all S&P 500 companies, the average revenue exposure to China is 4.8%.

We’re already seeing the tangible damage that the coronavirus is wreaking on operating results and stocks. The news yesterday that Apple (NSDQ: AAPL) downgraded its quarterly revenue forecast, due to weakening demand in China because of the coronavirus, pummeled Apple shares and the broader stock market.

Other companies are sure to follow suit, putting further pressure on the markets. The technology sector, which heavily relies on China for sales and manufacturing, is especially vulnerable.

As the epidemic unfolds, travel in and out of China remains restricted, factories have been shuttered, and global supply chains have been disrupted. Workers are staying home and consumers are tightening their purse strings. Global equities have taken a beating.


Read This Story: Flu-Conomics: Markets Are Running a Fever

In a note to clients yesterday, investment advisory firm Raymond James compared China’s tardy response to the coronavirus to the Soviet Union’s maladroit management of the Chernobyl nuclear disaster in Russia.

The firm’s team of analysts wrote: “the worst is yet to come…[and the] market is underappreciating the potential dangers.”

In a note last Friday, the Economist Intelligence Unit (EIU) warned that the Chinese government could face an “economic crisis” if the outbreak isn’t contained. The EIU downgraded its projections for China’s growth this year because of the virus.

You should heed these warnings. But don’t exit the stock market, either. You can still find stocks that are poised for outsized gains, with minimal risk to coronavirus-induced sell-offs.

Sectors that are immune to coronavirus…

As you can see from the above chart, the utilities sector is the least affected by the coronavirus. If you’re looking for a safe haven, utilities are a great place to start.

U.S.-based utilities derive zero revenue and earnings from China. Not only are they immune from the coronavirus, they’re also insulated from the Sino-American trade war.

Despite the “phase one” trade deal between Washington and Beijing, the destructive trade war rages on. Most tariffs remain in place and they’re dampening corporate profits. The war is the “new normal” and it’s unlikely to end before the 2020 elections in November.

But utilities are your shelter from geopolitical risk. Utilities confer growth, safety and income, in good times or bad. In these fraught market conditions, when the daily news sometimes seems like a nightmare, utilities are a sleep-well-at-night sector.

As of the market’s close on Tuesday, the benchmark Utilities Select Sector SPDR (XLU), the largest utilities exchange-traded fund (ETF) by assets, had returned 8.8% year to date, compared to a YTD return of 4.8% for the SPDR S&P 500 ETF (SPY). Over the past year, the XLU has returned 30.7%, compared to 25.3% for the SPY.

The XLU’s performance is all the more impressive, when you consider that utilities are dividend payers and less risky than the more growth-oriented broader market. Utilities stocks have enjoyed a nice run-up, but you can still find value in the sector, if you know where to look.

When looking for the best utilities stocks, our investment team always seeks healthy payout ratios, plenty of cash on hand, and a history of earnings growth. These quality dividend payers demonstrate greater resilience during market volatility and global crisis. For our “dividend map” of high-yielding utilities stocks, click here now.

In addition to utilities stocks, you should consider the booming marijuana industry. Pot stocks have corrected in recent months, which means you can currently find worthwhile investments on the bargain shelf.

Two pivotal pieces of legislation are pending in Congress that bode well for the future of canna-business:

  • The Marijuana Opportunity Reinvestment and Expungement (MORE) Act.

The MORE Act would federally deschedule cannabis and expunge the records of those with previous marijuana convictions. MORE would impose a 5% tax on cannabis sales, the revenue from which would be reinvested in communities most harmed by the War on Drugs.

MORE also would expedite resentencing for people imprisoned for marijuana offenses, protect immigrants from being denied citizenship because of cannabis, and prevent federal agencies from blocking public benefits or security clearances due to its use. The bill is sponsored by Sen. Cory Booker (D-NJ) and has more than 50 co-sponsors.

  • The Secure and Fair Enforcement (SAFE) Banking Act

The U.S. House last September passed the SAFE Banking Act, which is designed to protect banks that accept marijuana business clients from being penalized by federal regulators. The SAFE Act also would protect legalized states’ markets from federal prosecution. SAFE is now under consideration in the Senate.

If enacted, these laws would generate multi-year tailwinds for the marijuana industry. But you need to get ahead of the investment herd and act now. For our report on the best-positioned pot plays, click here.

Utilities and marijuana stocks are shrewd ways to protect your portfolio from unexpected global shocks. Is the coronavirus a “black swan” event? Too early to tell if it’s that bad. But as I’ve just explained, it’s already bad enough.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com