Notably, a couple of industries have been hit particularly hard throughout the ongoing Covid-19 pandemic. Investors are understandably worried, as businesses in these groups face severe challenges.
Nonetheless, here is the exciting part of the story – more often than not, short-term pains offer opportunities for long-term gains in the stock market and the business world as well, if you believe that the world will still keep turning. Focusing on the long run by opportunistically exploiting near-term volatilities or doing nothing in front of temporary setbacks is a substantial competitive advantage that investors can have market speculators. The key here, in our opinion, is to ride through the market cycle alongside the market leaders that have abundant liquidity and be patient.
Travel-related businesses may be the first coming to people’s minds on the risk side during a time like this, but we think that online travel agency Booking Holdings BKNG can come back even stronger than before, once travelers start to book again. Why? Economic hardships wipe out the financially weak, increase the cost of capital and raise the barrier of entry. This leading travel booking platform delivers super-normal profitability and cash flow, with its superior positions in China and Europe, as well as the resulting scale advantage in marketing and technology. It is worth pointing out that Booking.com is a top-10 travel app in 115 countries worldwide, compared with its two closest peers, Expedia EXPE, a top-10 travel app in 22 countries, and Trip Advisor TRIP, a top-10 travel app in 19 countries. Moreover, Booking Holdings has plenty of liquidity on its balance sheet, with a current ratio of 1.83 and a quick ratio of 1.68. The business requires minimal capital expenditure to sustain the operations.
As with Booking Holdings, Choice Hotels International CHH employs asset-light operations, which provides downside protection for shareholders. The vast majority (99%) of the business is running on a franchise model. We appreciate Choice’s positioning towards a mid-scale and economy market, resulting in less impact from economic downturns.
As you can see below, both Booking Holdings and Choice Hotels are priced at their decade-lows in terms of the free cash flow yield.
When it comes to the loan market, the subprime segment is usually the first to explode during economic turmoil, but this could benefit industry leaders like Credit Acceptance CACC. The management of the company is well known for its conservative discipline in underwriting loans compared with competitors, which have aggressively expanded businesses in the past few years. Also, the total size of the subprime market may grow as we come out of the pandemic, just like what we observed a decade ago after the Financial Crisis. Alongside the encouraging fundamentals is the insider buying by the CFO over the past month or so.
We cannot conclude the article without mentioning some retailers – one of the worst-hit groups these days. Coronavirus lockdowns are likely to accelerate the deterioration of brick-and-mortar businesses. At the same time, we think that leading off-pricers like The TJX Companies TJX and Ross Stores ROST can be among the first to recover, once consumers start to go out shopping again. Their value propositions fit well with the target market of budget-conscious treasure hunters. Meanwhile, these companies can even take advantage of the demise of their struggling peers (mostly department stores) to widen their moats and fuel long-term growth.
Credit Acceptance, TJX and Ross Stores all trade near decade-lows in terms of price-to-free-cash-flow (see below).
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Credit Acceptance and Ross Stores.
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