To say that the past few weeks have been unprecedented would be a dramatic understatement. The swiftness of the decline has caught even the savviest of investors off guard, and people are now fearing not only for their portfolios but also, more important, for the health and well-being of their families. Although this is the first time in modern financial history that a pandemic has caused such stock market carnage, it is not the first time that investors have felt as if “the world as we know it” has been altered, leaving them questioning when and even whether we will get through the crisis. We have been looking back through our letters from 2001 and 2008-2009, recalling the last time we stared into the abyss. Below, we compare and contrast those two periods with the present situation.
Later we discuss stocks featured in Boyar Research that we find to be particularly attractive, as well as a list of high-quality dividend-paying companies with which we are quite familiar that have piqued our
The Current Situation Versus 9/11
- From a stock market perspective, comparisons to 9/11 are not entirely apples to apples: going into that horrific day, for example, the bear market was already ~18 months old. However, the level of fear of the unknown seen then, in response to terrorism by an enemy we could not identify, does have parallels with today’s fears of a microorganism about which we know little. Now as then, individuals (and rightly so) are increasingly worried, if not downright petrified. The thought of boarding an airplane, congregating in public places, or taking part in the normal activities of daily life holds fear for most people. Back in 2001, the images of the falling towers were burned into our memories, and for the first-time television news ran a scrolling marquee at the bottom of our screens describing the terrifying events as they unfolded. Many in the New York area attended funerals almost daily while waiting for the next attack to strike. Then as now, fear was rampant. Our memories of the severity of that time might have faded with the years, but today we find ourselves amid similar levels of fear and uncertainty. Today the economy is significantly stronger than it was in 2001, but fear of the unknown, particularly of what will come next, is striking terror in the hearts of average citizens as well as the financial community. The indices are down significantly from their all-time highs, but so far are only back to where they were in 2018. As a result, some have suggested that stocks could fall significantly further. That could very well be true (only time will tell) but saying that the S&P is back to 2018 levels doesn’t come close to telling the whole story. Of particular importance, many good businesses, particularly in the small and mid-cap area, have corrected 50%-75% from their all-time highs. Well before the bear market officially began, these stocks had already begun to decrease in value significantly.
Below are excerpts from our September 2001 letter to clients:
Amid all the hammerings investors have endured since early 2000, the market plunge after September’s terrorist attacks would seem to qualify as a bottom. The Dow Jones Industrial Average fell 7.1% Monday, September 17th, the day the market reopened, and doubled the loss by that Friday, posting its worst weekly performance since the Great Depression. In the two weeks following, the market regained a good chunk of the post-tragedy losses {emphasis added}.
Will This Time Be Different? Investing During a Crisis is Usually a Good Bet
- Since World War II there have been nine major crises apart from the current one. These crises were precipitated by political fears, not investment ones. They include the 1948 Berlin blockade (risking another World War), Iraq’s 1990 invasion of Kuwait (threatening the world’s oil supply) and the 1998 Russian bond default (raising fears that a nuclear-armed nation would collapse in chaos).
- During each crisis investors felt confused, uncertain and panicky. Nothing in their experience, they believed, would help them cope with the ominous world they faced. Typical advice they got: “sell now, before it’s too late. Save what capital you have left.” This advice turned out to be completely wrong (see table below). It is foolish to sell into a crisis {emphasis added}.
- The table measures the performance of the Dow Jones Industrial Average, including dividends, from the first trading day after each postwar crisis to one and two years afterward. On the whole, the Dow was up smartly. The exceptions were the soviet blockade of Berlin, which occurred during a bear market that lasted until 1949 and the 1973 oil embargo, coinciding with the postwar economy’s worst bear market. One year after the nine crises, stocks had a 16.4% average return.
Of course, nobody can be so prescient as to know when the exact bottom will be reached and get 100% invested then. But even if you missed the bottoms, your gains remained impressive.
Crisis Investing
During nine major postwar crises, the Dow Jones Industrial Average has bounced back strongly a year later, with only two exceptions.
Investing During a Crisis
Excerpted From David Dreman’s column, Forbes Magazine – October 29, 2001
Comparisons With 2008-2009
The 2008-2009 panic differed from our present situation in one important way: the problems facing the market could be solved by fiscal/monetary policy. People did not fear for their physical safety; instead, they feared the prospect of imminent economic ruin. Like today, there were fears of “contagion”—but those fears were limited to the financial system.
As a reminder of just how alarming things looked in 2008-2009, we have reproduced a timeline (from The Wall Street Journal) that we featured in our third-quarter 2008 letter to clients, showing how the landscape of Wall Street changed forever over the course of just 90 days.
- July 2, 2008 The Dow Jones Industrial Average and Nasdaq Composite Index closed in bear-market territory for the first time in 2008. This drop in the equity markets was largely attributable to oil prices closing at $143.57 a barrel on the New York Mercantile Exchange. In addition, General Motors shares briefly dipped below $10 for the first time since the Eisenhower administration.
- July 11, 2008 The Wall Street Journal reported that the Treasury Department is “not talking about nationalizing “Fannie Mae and Freddie Mac, and was seeking to discount current reports that they were planning on placing one or both companies into a conservatorship.
- In addition, IndyMac Bank, a mortgage specialist, was seized by federal regulators. IndyMac bank had $32 billion dollars in assets and was one of the largest bank failures in United States history.
- July 15, 2008 The dollar declined sharply against all major currencies. The British pound traded above $2.00 and the Euro traded above $1.60.
- July 17, 2008 In an effort to raise capital Merrill Lynch sold its stake in media giant Bloomberg LP for about $4.43 billion dollars...
- July 26, 2008 Congress passed a massive housing bill. The bill included a Treasury Department proposal to increase Freddie Mac and Fannie Mae’s $2.25 billion line of credit with the Treasury. In addition, the bill allowed the government to potentially take an equity stake in the firms.
- July 30, 2008 The Federal Reserve announced that it would extend the date through which investment banks would be allowed to borrow from its discount window from its original September end date until January 30, 2009.
- September 7, 2008 Regulators outlined the bailout for Fannie Mae and Freddie Mac, which included a takeover of each firm and a government purchase of the companies’ senior preferred stock.
- September 15, 2008 Lehman Brothers announced that it would declare Chapter 11 bankruptcy. On the same day, Bank of America announced it would acquire Merrill Lynch in a $50 billion all stock-transaction. In addition, the front-month crude-oil futures contract settled below $100 a barrel for the first time since March and closed at $95.71 per barrel.
- September 16, 2008 The board of directors of AIG approved the $85 billion rescue of the insurance giant where the government agreed to take an almost 80% equity stake in the company...
- September 19, 2008 The Dow Jones Industrial Average increased over 400 points over reports that the federal government was considering a mechanism similar to that of the Resolution-Trust to allow banks and other financial institutions to take toxic assets off of their balance sheets. On the same day, the Security and Exchange Commission temporarily banned short selling in 799 financial stocks. In addition, the Treasury amid concerns that some money market funds were “breaking the buck,” announced a plan to insure the holdings of any eligible publicly offered money-market fund.
- September 21, 2008 Both Morgan Stanley and Goldman Sachs announced that they would become bank holding companies.
- September 23, 2008 Legendary investor Warren Buffett invested $5 billion dollars in perpetual preferred stock in Goldman Sachs. In addition, Goldman Sachs announced an equity offering on the same day in order to raise additional capital.
- September 25, 2008 In an FDIC forced sale, JP Morgan purchased the deposit base and some branches of troubled bank Washington Mutual.
- September 29, 2008 Citigroup in a deal facilitated by the federal government acquired the banking operations of distressed banking giant Wachovia. Subsequently, Wells Fargo made a counter-bid for Wachovia. On the same day the house rejected the $700 billion dollar Wall Street rescue package causing the Dow Jones Industrial average to fall over 750 points.
- September 30, 2008 The Dow Jones Industrial Average soared more than 485 points on investor anticipation that a rescue plan would be resumed in Congress
Potential Opportunities in High-Quality Dividend-Paying Names
Below is a list of stocks in companies that we know well, which we consider to be of extremely high quality, that are once again piquing our interest. We are certainly not calling a bottom here—investors should proceed with caution. However, we do believe that over the long term, investors should be rewarded for dipping a toe in the water.
Some of these companies are not only selling significantly below their average valuations for the past ten years but in some cases are approaching and are even below the valuations they were selling for in 2009 (all data is sourced from FactSet and was as of March 12th, 2020).
Opportunities in High Quality Dividend Paying Stocks?
March 12, 2020 Valuation Levels vs 10-Year Average
March 12, 2020 Valuation Levels vs 10-Year Average
March 12, 2009 Valuation Levels
March 2009 Valuation Levels
Below is a brief synopsis of why we believe Cisco, Bank of America and eBay are attractively priced for long-term patient investors.Once again, it is important to emphasis that we are not calling a bottom. Stocks could still significantly correct from here as each day brings further scarier headlines and images, however we believe from a long-term perspective investor are being offered attractive entry points.
CISCO (CSCO) $33.87 potential upside of ~71%
Cisco should be a beneficiary of
o what should be an acceleration in working from home, teleconferencing, etc.
o increased network security needs (CSCO provides one stop shopping)
o continued corporate cloud migration
o 5G build out
o IoT expansion
o Artificial Intelligence adoption
o Data analytics needs
- Switch and Router products were recently revamped and well received. CSCO has moved to 3,5, and 7-year subscriptions for new products (versus sale or perpetual licenses) that should smooth revenues over time.
- Net cash balance sheet
- Shareholder friendly with large FY2018/9 buybacks. Company has a policy of returning 50% of free cash flow to shareholders. The current dividend yield is over 4%.
- Large R&D spend at 12-13% of revenue and a successful serial acquirer of companies to expand capabilities and fill holes in its lineup.
- At 11x EBITDA, our estimate of intrinsic value is $58.40 using FY2022 estimates representing 71% upside.
BANK OF AMERICA (BAC) $22.04 potential upside of ~60%
- Well-respected management team that led the bank out of the last recession.
- Excellent credit profile as non-performing loans near historic lows
- Net charge-offs in 4Q 2019 0.39% of loans
- Allowance for loan losses 0.97% of loans
- #1 US Consumer Deposit Market Share and strong Online Banking and Mobile Banking functionality including Zelle payments
- Shareholder friendly with common shares outstanding down 9% YOY
- Tangible book value per share of $19.41 lends support to current share price
- Intrinsic value 1.3x book value per share equates to $35.50 (BVPS $27.32 currently) or ~60% upside
eBay (EBAY) $33.29 potential upside of ~69%
- eBay is an interesting almost uncorrelated play in the current environment given its substantial hidden asset value that provides a floor under the current valuation.
- ·eBay recently sold StubHub for ~$4 billion ($3.1 billion net), and Classifieds has reportedly garnered interest in the $10 billion range from multiple parties. Consequently, the two units could unlock ~50% of the current market value of the Company despite only representing 20% of revenue.
- · The remaining core eBay Marketplace has room for cost cutting beyond the 200-basis point margin expansion target announced by management. Accordingly, activists have nominated additional board members recently despite taking 2 seats last year, to ensure cost cutting is taken seriously. In addition, the stripped-down Marketplace could be a takeover target, including by private equity firms given its strong FCF generation, low leverage, and room for margin improvement. Intercontinental Exchange reportedly explored acquired the eBay Marketplace in recent months.
- · On a sum of the parts basis which includes the Marketplace at 12x EBITDA (well below faster growing ecommerce platforms, and above struggling bricks-and-mortar retailers), and Classifieds at the $10 billion private market value, we estimate that eBay is worth $56 per share (69% upside potential). The Company is expected to repurchase ~$4.5 billion worth of shares in 2020 (16% of current market value), and its dividend currently yields slightly below 2%.
The author and/or Boyar Asset Management clients own all of the aforementioned stocks either individually or through pooled vehicles the firm manages. For additional important disclosures, please visit: www.lp.boyarvaluegroup.com/disclaimer
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