ALERT: Adding Market Crash ‘Protection,’ Removing MSFT, BKNG

February 24, 2020 by Brian Nelson

Image source: Centers for Disease Control and Prevention.

ALERT: Adding Market Crash ‘Protection,’ Removing MSFT, BKNG

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Changes to newsletter portfolios

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We’re adding out-of-the-money put options to both the Dividend Growth Newsletter portfolio and Best Ideas Newsletter portfolio.

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We’re removing Microsoft from the Dividend Growth Newsletter portfolio.

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We’re removing Booking Holdings from the Best Ideas Newsletter portfolio.

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By Brian Nelson, CFA

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We’re making some moves in the newsletter portfolios today.

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The Dow Jones Industrial Average (DIA) is currently indicated down 900+ points in pre-market trading during the session Monday, February 24. We laid out a thesis where the US markets could experience a “crash,” and we encourage you to read that take here, “Is a Stock Market Crash Coming? — Coronavirus Update and P/E Ratios.”

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Apple (AAPL) smartphone sales in China appear to be pacing lower 40-50%, while Procter & Gamble (PG) noted that “results for the January to March quarter in China and for the total company will be materially impacted on both the top and bottom line by (the COVID-19 outbreak),” source 8-K, February 20. Both Apple and P&G had been removed from the newsletter portfolios previously.

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These are just two of the biggest companies in the S&P 500 facing material negative impacts to their operations, as roughly 30%-40% of companies reporting results during the past several weeks have mentioned ‘coronavirus’ on their respective earnings calls. We believe that forward S&P 500 earnings estimates are currently too high.

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As we reiterated in our prior note regarding the growing likelihood of a stock market crash, even a modest 10% haircut to S&P forward earnings estimates as a result of the COVID-19 outbreak coupled with a generous 16x forward multiple means the S&P 500 could return to 2,566, implying a swoon of about 20-30% from the 3,337 last closing price.

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We believe the forward P/E on S&P 500 earnings, after adjusting for the new debt from the dot-com peak and considering the modest haircut to S&P forward earnings estimates, is currently higher than what it was during the dot-com peak, or 24.4. We would not be surprised if Monday marks the beginning of a larger swoon to come.

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Let’s talk about what we’re doing.

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First, we are adding what we consider “crash protection” to both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. We are allocating roughly 1% of each newsletter portfolio to S&P 500 (SPY) put options dated September 18, 2020, strike price $250. It is likely that these put options may expire worthless, but we believe a market shock may be coming.

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Second, we’re removing a huge winner from the Dividend Growth Newsletter portfolio in Microsoft (MSFT). We’ve been fans of the company for years, even using it as the quintessential dividend growth stock in Valuentum presentations across the country — here is one such presentation (pdf), for example. Shares have advanced far beyond the high end of our fair value estimate range, and now are rolling over technically. We think it’s time for profit taking.

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Third, we’re removing a high-beta name from the Best Ideas Newsletter portfolio. Though we still like Booking Holding (BKNG), we are already rather tech/consumer-heavy in the Best Ideas Newsletter portfolio, and in light of the ongoing uncertainty on travel as it relates to COVID-19, we don’t think Booking Holdings will have much good to say about its business trends upon the next update. The stock could be under pressure for some time, in our view.

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Though many may look at the current 900+ point swoon on the Dow Jones Industrial Average as a “buying opportunity,” we think it is far from it. The number of cases of COVID-19 in China (FXI, MCHI, KWEB), South Korea (EWY) and Italy (EWI) grew again overnight, and there are now 219 virus cases in Italy and 833 in South Korea, both numbers up considerably in just the past 72 hours. Tourism to France is down 30-40% since the COVID-19 outbreak, and many Chinese businesses could start folding soon due to the cash crunch. There are now 1,402 confirmed cases outside of China in 28 countries, according to the latest situation report from the WHO.

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Adding to the widespread containment concerns is that many patients that tested positive for COVID-19 were reinfected later. The implications of this consideration on a potential vaccine could be dire, in our view, as it remains uncertain why the human body’s subsequent built-up immune response would not prevent re-infection. More and more, the COVID-19 outbreak is looking like it will impact 2020 global economic growth for at least the next few quarters as the base-case scenario. In the event there are but a few new, documented, uncontained cases found in one or two major US cities, we could very well see a market meltdown.

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We reiterate that, had the Dow Jones Industrial Average already swooned a couple thousand points on news of the COVID-19 outbreak, we might have considered some undervalued stocks with strong momentum potential “buying opportunities.” However, to this point in time, the markets have largely ignored COVID-19, with major US indices still sitting near all-time highs. We could be in for a wild ride in the coming weeks and months, and an outright market crash is not out of question. For those looking for short-idea considerations, please consider the Exclusive publication here. We remain fully-invested in the High Yield Dividend Newsletter portfolio given its yield and income focus.

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We’re available for any questions.

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Kind regards,

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Brian Nelson, CFA

President, Investment Research

Valuentum Securities, Inc.

brian@valuentum.com

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Tickerized for securities tied to “Is a Stock Market Crash Coming? — Coronavirus Update and P/E Ratios“

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Seeking 2019-nCoV vaccine/cure: CODX, JNJ, REGN, GILD, GSK, MRNA, VXRT, NNVC, VIR

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Note: The Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are simulated portfolios. SPY put options dated September 18, 2020 with strike price $250 closed Friday at $1.82 per contract. This was the price provided in the pre-market note above (there is generally a 10 minute delay from when we send the email to when it hits your inbox). According to member feedback, the opening price for this particular contract on February 24 was $2.59 and the lowest price printed was $2.49 as of 11:00EST. Due to limited resources and a number of other considerations, as of the end of 2017, we made the decision to no longer calculate simulated performance for the newsletter portfolios. Any prices provided are for information purposes only. This change is reflected in the article below. Thank you!