Looking for Value Caused by Coronavirus Fears

Tour agent wearing surgical mask at an airport
Credit: Carlos Jasso - Reuters /

I don’t wish to belittle the Hunan coronavirus in terms of its effects on those that have been infected or on their families, but from a market perspective it is a classic case of an overreaction. I suppose it is possible that this turns out to be "the" plague that decimates the planet or whatever the fearmongers are predicting, but so far, it is nothing like that. Here are some facts to consider:

According to this Fox News article, 64,366 of the world’s 7.8 billion people have been infected so far, with 1,383 of those cases being fatal. 99% of those cases and deaths have been in China, with one fatality in the U.S.  For comparison, 80,000 people died from flu in America alone in the 2017-2018 flu season, with somewhere between 291,000 and 646,000 deaths around the world every year.

As an American you are currently 80,000 times more likely to die from the flu than the coronavirus, but because of that, flu deaths don’t make headlines. Worrying about something like this that makes the news makes no sense. It is in the news because it is rare, not because it is commonplace.

I know that this could spread much further before all is said and done, but the biggest problem right now is not the disease itself but the fear that the headlines have prompted. Fear is not a rational emotion, but even so, when I hear as I did yesterday that my local Chinese restaurant is struggling as people are afraid to eat there, I cannot help but shake my head.

Risk evaluation like that certainly has no place in trading.

Yet, as the headlines hit, so some stocks get hit as if this is certain to be the “big one.” It happens every time there is a panic, and every time it is forgotten at most a few months later. Even if the problem is still around at that point, the news media will have moved onto another story, and nobody will be thinking about coronavirus, let alone worrying about it.

So, where should you be looking for value as this all plays out?

For most Americans, the most harrowing stories over the last couple of weeks have been about passengers quarantined on cruise ships. A lot of people can imagine themselves in that position and relate to how distressing that would be, so it is no surprise that those stocks have been hit hard. To be fair, the spread of the virus will have a material impact on results as long as it lasts, so that is not completely irrational.

But, should a stock like Norwegian Cruise Lines Holdings (NCLH) be down 12 or 13% on a temporary disruption?

NCLH 1 YTD chart

This is a company that has generate EBITDA of $1.82 billion over the last 12 months, with levered free cash flow of nearly 900 million, so there is definitely no existential risk. There is a risk to this quarter’s revenue, but that looks pretty much priced in, and do you really think it will go beyond that?

If not, then you should consider other aspects of their business. Consumer strength is driving growth around the world, vacations are still popular, and people like cruising. Inflation and fuel prices remain relatively low, which has enabled cruise lines to increase what have in the past been somewhat skinny margins. NCLH, for example has a 15.14% profit margin.

None of those things have changed as a result of coronavirus so trailing and forward P/Es of 12.1 and 9.7 respectively look like tremendous value. If you can control your emotional response to the headlines and scaremongering, it is pretty obvious that NCLH will bounce at some point. That may not be straight away but starting to average in at about this point will pay off before too long.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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