There’s no surer deflator of markets as uncertainty. It’s the key ingredient to any bear market; the more there is, the sharper the falls.
That’s why the coronavirus is wreaking such havoc. No one really knows how far it will spread, how many deaths it will cause and how long it will last. The potential economic impact ranges from ‘sharp but short’ to ‘severe and enduring’. Though in a highly interconnected world, and with infection rates rising, most experts are suggesting it could be towards the less desirable end of that spectrum.
Layer on top of that a collapse in the price of all, and the myriad ramifications that can have for credit markets and geopolitical tensions. That wasn’t even on the radar a few days ago, and we could well imagine other factors that might emerge as the crisis continues to unfold.
Although we don’t know how the current situation will play out, there’s a few near certainties that should serve as a guiding light for investors.
First, this will pass. Even under a worst case scenario, we’re not talking end of days here.
Second, risk is not about the chance of short-term loss. Risk is the prospect of a permanent loss of capital. In a bear market almost all shares fall, but it’s the ones that never recover you need to be worried about.
Finally, shares with strong balance sheets — lots of real assets relative to liabilities — and reliable cash flows are the ones that will endure. In fact, they tend to emerge from bear markets in even better shape.
If you’re looking for safe harbour, these companies are worth a closer look.
Integrated Research (ASX:IRI)
Integrated Research provides IT system monitoring software for large enterprises. You may not of heard of it before, but it’s a leading global player in its industry, servicing some of the largest global corporations. Its products are mission critical and tightly embedded into client systems, allowing for a lot of high-margin, recurring revenue.
The company has zero debt, and around $7.6m in cash. It’s highly cash generative, and has been able to sustain a decent and growing dividend for many years while also self-funding significant revenue growth. And, because 95% of revenues are earned offshore, a falling Aussie dollar is a good thing for Integrated Research.
Explore the Strawman Company Report for Integrated Research here.
A manufacturer of medical disinfection equipment, Nanosonics has seen its revenues more than quadruple in the last five years as the company successfully expanded into offshore markets. Operating under a ‘razor-and-blade’ model, it generates a reliable and high-margin revenue stream from the consumables it sells to customers (who are likely to be especially conscious of the need for effective disinfection at present!).
It too generates the lion’s share of revenue from overseas and therefore benefits from a weaker dollar. Importantly, it has zero debt and a whopping $82 million of cash on hand. With a large and growing addressable market, an industry leadership position, and new products about to be released, it seems likely Nanosonics is well placed to be a more profitable business in the years ahead.
One thing to bear in mind is that, despite the recent pull back, the company remains very much on a growth multiple with a PE of 151. Bulls argue that that’s justified by a very robust growth outlook, but investors should be mindful that the share price could potentially fall a lot further if sentiment continues to deteriorate. The business itself, though, appears rock-solid.
You can see what price Strawman members think is reasonable by visiting the Company Report here.
A former market darling that the market was seemingly happy to bid for at any price, Altium has seen shares lose a third of their value in recent weeks. As with Nanosonics, shares still trade at a lofty multiple despite the retracement — the PE is presently around 48.
That being said, Altium is a profitable business with the majority of its revenues being recurring in nature. There’s zero debt and over $80 million in the bank, and a history of rising dividends. The company enjoys a stiff tailwind, and continues to expect very strong long-term growth, even though they said the coronavirus will have some short-term impact to sales.
Again, investors can debate what price is fair, but the business itself is extremely well placed to endure through this difficult environment. You can dive deeper into what other investors think here.
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