So, the stock market is all but literally unhinged from the economy. No one truly knows where the stock market is going, I did not even write a post recently about stocks because of the unpredictability of the stock market. The traditional rule book on how to pick stocks during a recession is not going to help you right now. Any thought of using it should be removed from your head if you expect to take a risk in the stock market.
It is worth mentioning that I am a blogger on the internet. If people with 8 degrees who specialize in economics have no idea of where the stock market is going why would I? However, I can give my two cents on how to pick your stocks during these troubling times.
Do Not Buy Exclusively Because Of A Discount
One of the fundamental rules in how to pick stocks is to buy low and sell high. This rule should not apply in the near future, especially not universally. Companies that have historically done well may not do well through the Covid crisis and maybe not even after.
One thing you could do is to compare the 50 day average to the 200 day average. When the 50 day average crosses over the 200 day average that suggests you should buy, when the 50 day average crosses below the 200 day average it suggests you should sell. But even these will not tell you is the business will survive. Some stocks may be facing a long term downturn or even a closure.
Hospitality Will Not Recover Soon If Even At All
Travel and traditional venues for entertainment have been closed or heavily restricted for months because of the Coronavirus. Even after we develop immunity to the novel Coronavirus by vaccine or exposure people may not be ready to return to these places. A pandemic is never caused by just a pathogen, it is caused by fear. The pandemic will continue at least a little time after the virus is more under control.
The only upside is that millennials tend to travel more and take more vacations. Furthermore, millennials on average are less afraid of the novel Coronavirus than older demographics. When the virus is more under control millennials could help with the rebound for hospitality by travelling more. They pretty much did not stop their vacations due to the virus now, why would they stop when the virus is more under control?
There is still a very good chance some companies will close down. For instance, airline stocks and especially cruise line stocks could fall further down or even close, unless people believe that they can operate at a lower capacity after taking a severe hit and recover. Keep in mind, the most profitable airlines need to fill 73% of the plane’s seats just to break even. At the very least, I would classify these stocks as high risk discount stocks.
If you are reading this close to when published, people are still fearful of the Coronavirus. If you are reading this when the Coronavirus Crisis is history, note that hospitality almost always takes a massive hit with recessions.
Retail Is Taking A Hit
Any store that is consider non-essential retail has at least seen some drop in revenues, especially if these retailers have no eCommerce element. The list of bankruptcies is ever growing as the crisis continues.
Investing In Discounts
If you want to pick risky discounted stocks during a recession, you need to look at the financials of the company. You should try to find a company with low debt and good cash reserves.
Furthermore, if the company was able to adapt to these harrowing situations, it could not only be a good value, but potentially come out as something new and strong after this crisis. As usual, invest at your own risk.
FOMO is the fear of missing out. There are many stocks right now that appear to have rallied when others are facing problems. These include some pharmaceutical companies and some tech companies. These are companies you have probably heard about. These companies are in general doing well. Some of them can even justify their rally. But just because they rallied does not mean they will continue growing. They could have just had their highs right now.
However, these stocks are more likely to be driven by emotion than value after their rally. This can make them more speculative. If you want to pick a stable stock you should avoid stocks that can easily be driven by emotion.
You Do Not Need To Miss Out
While some individual stocks may have had a rally there are likely competitors that are producing similar product. Some of the companies that rallied in price have an edge over some competitors that consumers want during the crisis. But what about after the crisis, will people still want those products to justify the price of the company?
To determine if the rallied company is worth investing into, you should check their financials (advice I will repeat because it is good advice). Furthermore, check the company portfolio, know everything the company makes, or what they are trying to put in the pipeline. Last thing you want to invest in is a one-trick pony that only saw potential in a crisis. If you missed out on a rally investing in the company now will not change that.
If you are hesitant to invest in the rallied companies you can check the competitors. Many of their competitors are trying to produce the product that rallied the company you are feeling FOMO for. Why would a company not want to capture lightning in a bottle? You should check on where the competitor is in the stages of the breakout product/service. The competitor could be at a stage where they can come out with a different edge over the rallied company’s product. In addition, if a competitor has a broad portfolio they could be developing a different product/service that could have consumer appeal outside the Coronavirus crisis. FOMO is the last thing to drive how you pick stocks during a recession.
Choose Companies That Did Not Rally As Much As They Grew
While many industries are struggling there are some that have benefited broadly during a crisis. Unlike many that have rallied significantly they have not severely shifted their portfolios. These industries include home improvement, home entertainment, home offices, just about anything with the word “home” in it. Not only have homes become a haven from the virus, but our offices, our vacation spots, and our restaurants. Many people are now spending less time on the road and in office so they have spent more time in their home.
While these companies have certainly benefited from lock downs and the pandemic they have always been around and kicking long before the Coronavirus. Their current portfolios have been enough to keep them profitable before the pandemic, and people will still turn to them when the virus is more under control.
Invest In Evergreen Companies Which Have Benefited
These types of companies are probably the safest bet for the pandemic. With the pandemic still ongoing many will turn to other avenues for entertainment and productivity. They will not go anywhere after the pandemic. In fact, they could become more popular as the tailing effects of the pandemic affect the people. For instance, people may cook more meals at home and specialty foods than go out to eat if money is less valuable or scarce. Theaters may never return and more people turn to streaming services. Some contractors who specialize in repairs may not be hired due to a lack of money or fear of the spread of the virus and people may turn to DIY repair themselves.
Keep in mind, these companies require supply lines and can be driven by prices of materials. These can change at almost any moment. Some home improvement companies suffered because lumber prices topped out mid last year probably before any nation knew about the Coronavirus. Now lumber prices have increased significantly.
The stock market is very exciting right now. While some stocks appear attractive you need to ask three things. Is the discount justified? Did the company rally? Is the growth the company went through natural given the conditions of the world and can this growth still happen with the tailing effects of the pandemic? It may be scary to try to pick stocks, especially during this recession, but there are many good choices out there and some of them could be used to forge your wealth.
There is one universal rule I will share. If you do not have the money to spare or you have a short-term financial goal such as saving up for a large purchase, paying off debts, or establishing a good emergency fund, those avenues may be the best way to go this year, and probably even the next. There is no risk free way of how to pick stocks during a recession, but you must determine what your tolerance is before you try.