The economic disaster caused by the COVID-19 pandemic continues. Initial jobless claims surged to more than 6.6 million on a seasonally adjusted basis in the last week of March, and orders for on-site shelters remain in force to combat the spread of the contagion. The S&P 500 has faced pain with a 20% drop in the first quarter of 2020, and the fallout may not be over yet.
So loading recession-ready stocks – those that will stay strong during the economic contraction and rebound quickly once the world starts to recover – is still not a bad idea. For the month of April, I am eyeing Verizon (NYSE: VZ), Microsoft (NASDAQ: MSFT), and Ali Baba (NYSE: BABA).
Telecommunications more important than ever
It goes without saying that the coronavirus epidemic will hurt most businesses, but some industries and businesses were better prepared than others to deal with it. Verizon could be one of these companies.
Mobile telecommunications services have matured after a few decades of growth driven by increased mobility and data services. What was once a discretionary element on the cutting block when consumers were in a pinch becomes more of a basic necessity. In addition to basic voice and text, the mobile network speeds that accompany increasingly popular unlimited data plans are often almost as fast as the wired Internet connections of many households – thanks in large part to advanced 4G LTE. In this regard, Verizon’s network is still top notch and, on average, AT&T and T Mobile.
Verizon itself can also have the added benefit of having a network fast enough for some households to use their data plan as a way to cut costs elsewhere. As early evidence of this possibility, CEO Hans Vestberg said in a recent CNBC interview that Verizon’s overall web traffic increased by 20% week by week in mid-March – thanks to TV and video game streaming . For many, Verizon 4G has enough firepower for their entertainment needs.
Deployment of 5G networks was just beginning in 2019, and Vestberg said Verizon would increase capital spending by $ 500 million (for a new range from $ 17.5 billion to $ 18.5 billion) to continue its upgrades this year. While Verizon made a few missteps in acquiring media companies AOL and Yahoo! a few years ago, it refocused on its telecom core business in recent years. In contrast, AT&T spent around $ 85 billion for Time Warner in 2018.
Verizon’s net debt is still quite high at $ 109 billion, but the company generates lots of free cash flow (revenue minus operating and capital expenses) – even after its extra spending on upgrades of the new generation network – to cover liabilities and cover its dividend, which currently earns 4.5%. It is not perfect, but the largest American telecom should be doing well during the crisis.
Image source: Verizon.
Cloud computing has just been cemented
Money is king, as the proverb says. And no one has more money right now than the tech giants. At the end of December, Microsoft had $ 134.3 billion in cash, cash equivalents and short-term investments, and $ 69.6 billion in debt, which is good for net cash of $ 64.6 billion. This makes the legacy IT one of the wealthiest organizations in the world, although still behind Google Parent’s $ 115 billion cash hoard. Alphabet.
Either way, Microsoft has enough cash to cover general expenses (net cash equals a few years of operating expenses), buy back shares, invest in future growth, or do whatever it takes. ‘she can imagine in the coming quarters. Microsoft is in great shape to handle almost everything launched to it. In addition to having deep pockets, the company has transitioned to cloud computing services, a migration that has resulted in a 14% increase in turnover and 35% in operating profit over the last quarter published.
Certainly, organizational spending on cloud computing services could take a hit for a while, as the effects of the pandemic are digested. Nevertheless, global cloud spending has continued and is expected to continue growing in the long term with double-digit percentages. It is still early days, but it seems that everything related to digital has just received a massive shot because of the epidemic, as households are forced to stay at home and employers are adopting policies of teleworking.
Microsoft stocks have been roughly flat since the start of the year, but almost 20% below the record level recorded in February. The stock is still trading for a premium of 29 times free cash flow over 12 months, but it is the norm for high quality businesses. Once the dust settles, Microsoft will likely be in a position of strength like never before.
E-commerce in China: a bridge over troubled waters
For the last stock ready for the recession, we are traveling to China. During the early days of the coronavirus epidemic, electronic commerce played an invaluable role in helping to contain the spread of the disease. Digital sales were already growing north by 20% a year and accounted for a quarter of all consumer spending in China, figures that are expected to increase once official figures are released after the coast is clear.
This puts Alibaba in a privileged position to weather the storm. However, it should be noted that management has not provided any guidance for 2020; instead, he said the results will be mixed, as retail and travel expenses decrease, offset by an increase in grocery and delivery services. Cloud computing, which increased by 62% year-on-year in the last quarter of 2019, should also hold up well.
So why Alibaba stock now? Unless there is a particularly disastrous change in outlook – which seems unlikely, as signs indicate that the Chinese economy is starting to recover – Alibaba should be doing well in a post-coronavirus world. CEO Daniel Zhang mentioned in the last results call that e-commerce exploded after the SARS epidemic in the early 2000s. Something similar is emerging from COVID-19. As China’s leader in digital, Alibaba deserves the attention of investors.
Alibaba declared $ 54.3 billion in cash and cash equivalents and $ 17.6 billion in debt at the end of 2019. Already a fast-growing company as China moves to a consumer economy, this tech giant is ready for a global recession.
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Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Nicholas Rossolillo and his clients own shares in Alibaba Group Holding Ltd., Alphabet (C shares), AT&T, Microsoft and Verizon Communications. The Motley Fool owns shares and recommends Alibaba Group Holding Ltd., Alphabet (A shares), Alphabet (C shares) and Microsoft. Motley Fool recommends T-Mobile US and Verizon Communications and recommends the following options: long calls from January 2021 to $ 85 on Microsoft and short calls from January 2021 to $ 115 on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.