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COVID Delta Part 4

A worksheet for conducting your own COVID Delta investment portfolio analysis

Here is a worksheet for conducting your own COVID Delta analysis.  In case you aren’t familiar with the idea behind COVID Delta, check out COVID Delta Part#1: A tool for investment portfolio analysis. 

COVID_Delta_Worksheet_3Download

Interactive COVID Delta Worksheet

  1. Enter the ticker symbols for stocks you are interested in.
  2. Without looking at prices, add notes for each stock, indicating how you think its value as a company has changed since the Pandemic began in mid February.  I like to do this after listening to the most recent earnings call and looking over the company’s Web site.
  3. Enter a “fair” percent change in value given your analysis for each stock.  For example if you think that the pandemic has hurt the company’s earnings but it should recover in a year or two, you might enter “-10%” to indicate you think the company is 10% less valuable now  that it was in February 2020 (assuming there was no pandemic).
  4. Look up the most recent price for each stock, and the price on February 19, 2020.  Enter those values in the appropriate column of the worksheet.
  5. Calculate the actual percent change and enter it in the appropriate column. 
    • Actual_%_Change = (Recent_Price – Feb_18_Price) / Feb_18_Price
  6. Calculate the COVID Delta and record it in the appropriate column. 
    • COVID_Delta = Anticipated % Change – Actual_%_Change
  7. Print or save a copy of your analysis and look at it next time you are making an investment decision.  Remember, a positive score means a stock is potentially underpriced compared to what you think it is worth and might be a good buy.  A negative score means it is potentially over-valued, and you should be careful

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COVID Delta Part #3

New Year 2021 — is there a stock market bubble?

At heart I am a value investor.  I do invest in high multiple stocks, but only when I think their long term earnings will grow into that valuation.  I sometimes let stocks run beyond their fair valuation because they are popular and have momentum, but feel uneasy doing so.  In the end I believe that given sufficient time stock prices revert to a reasonable multiple of their future earnings, and I am always looking for opportunities to buy below that number and sell above it.

Given these predilections, the current market is a puzzler.  Many of the stocks I have liked and followed in the past (e.g. AVAV) have gone well beyond what I think they could reasonably earn in the foreseeable future.  At the same time, some stocks that I think have good long term prospects are dead in the water and it is hard to hold them while the market climbs continually higher.  Pervading it all is the ongoing debate about whether there is a stock market bubble.

Considering this uncertainty I decided to run a COVID Delta analysis on some of the stocks I am following; check out COVID Delta Part #1 if the idea of COVID Delta is new to you.  My goal is to figure out:

  1. Is the market as a whole overvalued?
  2. Are the growth stocks I like just a little expensive, or completely outrageous?
  3. Do the lagging value stocks represent a big enough opportunity to be worth the wait?

What I found — the market (S&P 500) as a whole is not particularly overvalued compared to where it was in February of 2020, though I felt it was getting a bit toppy then.  There are however a number of stocks I follow that are trading much higher than I might have expected and others significantly lower.  I will look to trim the former and add to the latter.  Here are the specific stocks I looked at, and corresponding COVID Deltas as of 16 January 2021.

Analysis% Anticipated% ActualCOVIDDelta
AAPLApple has been able to pivot quickly away from needing its retail stores during COVID and its products have benefitted from work-from-home. It has introduced a number of new products over the past months, including a new line of 5G phones. Its services business has continued to grow, and it is rumored to be re-emphasising its electric car efforts. Overall it has benefitted moderately from COVID and continued to execute well on its strategy.+20%+59%-39%
AMATAMAT has weathered COVID with relatively minor impact to revenue and the thesis that semiconductors will play an even bigger role in the future economy has strengthened. A biden presidency should provide some short term benefit. Solar will benefit from federal subsidies and displays will benefit from continued stimulus spending. A more conciliatory relationship with China will reduce the pressure on them to develop their own semiconductor equipment capacity. AMAT was fairly inexpensive at the beginning of COVID. On the down side the semiconductor capital equipment industry can build a lot of innovation and capacity without growing, which makes it easy to overestimate the impact of trends in demand for chips on equipment suppliers.+30%+58%-28%
AONCOVID has had a significant negative impact on Aon in areas such as travel and entertainment, where its customers have had far less to insure. As the pandemic abates, these should come back quickly. More broadly the amount of change and disruption in the global economy has increased the scope and complexity of risk that individuals and companies have to deal with. Increased complexity is good for Aon as underwriters and insurance customers need more help understanding their risks. Scope of risk opens opportunities for new products (cyber, IP, …). On the down side, these are also opportunities for smaller and more nimble competitors to gain market share and first mover advantage. Apart from COVID, the WTW acquisition is a net positive in that it moves the market from oligopoly towards duopoly.+20%-12%32%
AVAVAerovironment has continued to grow its defense footprint with contract wins and numerous new product introductions, including aggressive acquisitions. They continue to make progress on HAPS. So far Starlink seems mostly complementary (wide area low capacity vs. HAPS which is potentially a way to put a lot of density in a particular area quickly). Longer term Mars helicopters could make AVAV part of the space economy as well. Ag business doesn’t seem to be getting any traction. I expect that there will be more military conflict over the next couple of years as China, Iran, North Korea, and the Taliban test the Biden administration.+35%+86%-56%
EXASAt the beginning, COVID was a setback to Exact Sciences because their sales people couldn’t meet with doctors in person and because procedures requiring their tests were being deferred. They quickly replaced that lost revenue by repurposing some of their labs to conduct COVID testing. They also saw a rapid acceleration of their roadmap for online prescribing, due to relaxation of restrictions on telemedicine. Recent acquisitions show that they aim to be an acquirer of advanced cancer detection products.+40%+46%-6%
GOLDAfter some minor operational impact from the pandemic, Barrick has adapted and is producing at near pre-pandemic levels.  They continue  executing on their strategy of operational excellence and good relationships with people/governments in the places where they have mines. That said, their long term results will be most strongly correlated to the price of gold. Anything over $1,200 per ounce adds significantly to their margin (though not pure margin because they have royalty agreements tied to the price of gold). Gold is up ~20% since the start of the pandemic, but has been heading down as risks around the US presidential election are resolved. The largest segment of gold demand is still jewelry and there is presumably significant pent up demand from COVID deferred weddings in India and China. I also believe that there will be ongoing risk/uncertainty in the coming years.25%+12%+12%
HONMix of businesses that benefit (PPE and warehouse automation) and are hurt (aerospace) by COVID. Sales are off ~15% due to COVID, but likely to bounce back quickly as travel comes back. HON has also become a player in quantum computing. Given the growing availability of vaccines, aerospace should bounce back quickly and other businesses continue to thrive.25%+14%+10%
IBMIn the near term IBM has been hurt by a concentration of customers who have been hurt by COVID (banks, airlines, …). These should recover as the pandemic subsides, but technology investments might be hampered by the increased debt they took on to survive the pandemic. IBM’s cloud centric strategy has made some progress, but not enough to change valuation. The spin off of its services division seems like a good idea, but also not enough to significantly change valuation. Also of concern–why wasn’t IBM able to take more advantage of the accelerated digitization that boosted a lot of its competitors.-10%-15%+5%
KMIIn 2020 Kinder Morgan saw a reduction in revenue due to lower demand for natural gas from the global economic slowdown. This should go back to historical levels as COVID recedes and the world moves away from coal. CNG will likely be a wash as US transport capacity increases, but other low cost producers like Saudi Arabia also come on line. There may be opportunites to acquire assets at good prices from pipeline operators who don’t survide the pandemic, but probably not a big impact because there is so much money competing for investments. Low interest rates are good in the near term, but could be a problem longer term if there is significant inflation. Biden administration will likely increase regulation, which is good for incumbents like KMI. They a have started talking about hydrogen transport, which is immaterial in the near term but could be important in the future.10%-30%+39%
SPYMany stocks in the S&P have suffered a significant loss of business since the pandemic started and have had to incur significant debt to survive (e.g. hotels and airlines). Others have benefitted (e.g. Amazon). In aggregate the effect is negative given reduced economic activity. Also, the S&P was a bit expensive before COVID. On the positive side, the government has injected a lot of money into the economy, and bankruptcies in smaller private companies could mean less competition in the future. There is also significant pent up demand that will be satisfied in 2021 and 2022 as the pandemic subsides.10%+12%-2%
TThe pandemic has hurt AT&T’s b2b business, but helped its home and mobile business. Lockdowns have probably helped it’s content business, but likely not in a material way. We are one year closer to 5G, which makes it a bit better.0%-24%+24%
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COVID Delta Part #2

How did my investments do? (11/10/2020)

Looking back on my my analysis from this past summer (COVID Delta Part #1), the COVID Delta proved useful in the case of AAPL, AMZN, and AVAV–all of which I sold near their peaks and subsequently bought back at lower prices.  It also highlighted the opportunity in EXAS, which I bought before its recent run.

It was less useful with ISRG and NVDA which have continued higher despite a significantly negative COVID Delta, and CVA and RTX which are flat or down despite a positive score.  ARWR, FSLR , and KMI have also moved contrary to their scores, but those have had significant news in the interim which explains their direction.  

Overall I don’t rely on the COVID Delta as my sole basis for buying or selling a stock, but I do find it useful as one of several screens.  My goal is to find several techniques, each of which improves my investment performance ~1% per year, and I think COVID Delta will do that over time.

Here are a couple of updates as of 11/10/2020.

Analysis11/10/2020Anticipated11/10/2020 ActualCOVIDDelta
AAPLApple has been able to pivot quickly away from needing its retail stores during COVID and its products have benefitted from work-from-home.  It has introduced a number of new products over the past months, including a new line of 5G phones. Its services business has continued to grow.20%45%-25%
AMATAMAT has weathered COVID with relatively minor impact to revenue.  Thesis that semiconductors will play an even bigger role in the future economy has strengthened.  Presidential election shouldn’t have a major impact.  “Other” businesses solar and display look stronger going forward.10%6%4%
AVAVAerovironment has continued to grow its defense footprint and make progress on HAPS.  So far Starlink seems more complementary (wide area low capacity vs. HAPS which is potentially a way to put a lot of density in a particular area quickly). Unclear whether ag business is getting any traction.20%33%-13%
CSCOCisco has an interesting mix of businesses that have been hurt by COVID (on-prem phone systems), and helped (WebEx), and some that are probably never coming back (legacy video conferencing).  It could easily take them another year to get back to their pre-CoOVID trajectory.  With significant innovation they could be a significant beneficiary of re-thinking the future work environment.0%-17%17%
OLEDOLED experienced some loss of revenue due to COVID factory shutdowns, but has since recovered and is growing revenue and earnings.  OLED adoption continues to grow, with televisions on track to exceed cell phones.  They have also launched a vapor jet printing equipment venture which seems like an ideal acquisition candidate for AMAT.  OLED for lighting purposes is becoming a reality.  Finally, when blue OLED is perfected it will give a rapid 25%+ boost to revenue.  The bad news—this stock is still very expensive. 20%18%2%

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COVID Delta Part #1

A tool for investment portfolio analysis (8/8/2020)

Improving your stock portfolio return by just 1% per year has a big impact over time, so I am always looking for easy ways to make investing decisions just a little bit better. A filter I have been using for the past several months considers how stocks are priced today vs. immediately pre-pandemic.  Has the pandemic hurt the company in a significant long term way? Has it helped?  Or is there no meaningful impact given a medium to long term time horizon? I call the resulting number the “COVID Delta.”

I started by making a list of stocks I follow regularly.  I thought about how their prices “should” have changed since February of 2020, given the impact of COVID and major non-pandemic news over the past six months.  Finally I compared where they trade today with where I predicted they would be.

Based on my intuitive estimate of a stock’s price since the pandemic — the COVID Delta is the difference between that expectation and the actual price.  A positive number indicates a stock priced below my expectation, that might be a good buying opportunity.  A large negative COVID Delta makes me think twice about an investment.  Here are some examples from early August.

Analysis8/8/2020
Anticipated
8/8/2020 ActualCOVID
Delta
AAPLWhile COVID has closed Apple stores and caused minor disruptions to supply chains, work from home has driven demand for Apple devices. At the same time, Apple has continued to execute on its move to services based revenue streams.+20%+37%-17%
AMATSemi equipment purchases are generally long term decisions, so COVID impact should be small.  Semiconductor demand and innovation have been strong over the past six months+10%+0%+10%
AMZNLarge near term gain on core business and medium term gain from accelerated digitization.  Longer term elimination of B&M competitors.+30%+45%-15%
AONShort term negatives due to higher claims processing costs and business customer (business) cost cutting and lack of business volume.  Medium term negative due to carrier uncertainty.  Long term benefit from increase in incurable risk.-15%-18%+3%
ARWRContinue to advance multiple treatments through trials.  Some disruption in ability to execute trials due to COVID.  Have some potential COVID solutions, but seem unlikely to have a big financial impact due to a large number of competitors … some further ahead.+0%+0%+0%
AVAVDefence business should see minimal impact from COVID and the value of other businesses is mostly medium-long term.  Advances by Starlink over the past six months cut into opportunities for HAPS.-5%+31%-36%
CSCOPositive impact from increased WebEx demand and accelerated digitization.  Negative uncertainty from reduced on-prem business demand and back-to-work uncertainty.+0%+0%+0%
CVANegative due to reduced commercial activity and depressed commodity prices.  Negatives amplified by less value in future innovation/growth-15%-35%+20%
DOWNegative due to short term decrease in demand for manufactured goods.  Positive due to increased demand for PPE materials.  Positive due to cheap natural gas.  Negative due to increased trade tensions with China.  Negatives amplified due to lack of future growth/innovation.-10%-11%+1%
ECLShort term negative due to reduced hospitality, commercial, and elective medical demand.  Long term positive due to cleaning focus.  Positives reduced by COVID transmission being more airborne than surface-20%-6%-14%
EXASShort term negative due to inability of sales teams to meet with doctors.  Short term positive due to COVID testing revenue.  Long term positive due to accelerated adoption of telemedicine and direct digital relationships with customers from COVID testing.+20%-13%+33%
FSLRCOVID should have minimal direct impact on utility scale solar installation.  Positive impact of increased likelihood of Biden presidency due to focus on promoting/subsidizing solar.  Positive impact of reduced likelihood of improved relationship with China making near term removal of protective tariffs unlikely.  Stock was already down going into CO
VID, so think about the correct baseline.
+20%+30%-10%
HONMix of businesses that benefit (PPE and warehouse automation) and are hurt (aerospace) by COVID.  Sales are off ~15% due to COVID, but likely to bounce back quickly as travel comes back.  HON has also become a player in quantum computing.+10%-13%+23%
IBMPositive from increased digitization.  Negative for services business from short term cost cutting due to uncertainty and direct COVID impact.  Past six months performance to roadmap in-line.+0%-17%+17%
ISRGSignificant negative short term impact of CO
VID on elective procedures.  Negative medium term impact of inability to train new doctors.  Medium term positive impact of increased desire to reduce inpatient procedures, and the backlog of procedures to be performed.  Competitor introduction of competing products delayed.  No major changes outside of COVID.
-5%+13%-18%
KMIShort term negative due to reduced oil and gas demand.  Med-long term negative due to increased chance of Biden presidency and aggressive focus on de-carbonization.  Positive due to weakness among competitors and likelihood of getting additional assets at better prices.-10%-34%+24%
NVDAPositive due to accelerated digitization.  Short term negatives on demand and production seem minimal.  Apart from COVID it has generally been doing well vs. roadmap.+20%+51%-31%
OLEDSignificant short term negative impact from COVID, but most value is in out years and future growth of OLED.  Good execution against long term roadmap over past six months (e.g. new OLED TVs and phones).  Also continue to advance technology (OVJP).+0%+5%-5%
RTXMinimal impact to defense business.  Major negative impact to commercial business.  Value of pre COVID baseline limited due to merger.-10%-36%+26%
SBUXShort term negative due to closed and limited stores.  Medium term negative from more work from home.  Long term positive due to less competition and cheaper real-estate.-20%-15%-5%
SPYNear term significant negative impact to US and global economy.  Medium term some parts of the economy may be permanently diminished.  Large number of workers might need to be re-trained.  On the positive side likely to drive innovation and accelerate adoption of new approaches and technology.  Fighting COVID also drives some economic activity.  Pre COVID there was a sense that the S&P was a bit overvalued.-10%-10%+0%
TPositive impact of increased work from home demand for internet, mobile, and HBO.  Negative from decreased on-prem demand and on-demand adoption hurting direct TV.  Potential negative from difficulty producing new content.-10%-21%+11%
8 August 2020 COVID Delta Analysis

To see how I did, see COVID Delta Part #2.

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Who am I, Why am I here?

World Tank League is a personal project (one of many) that I pick away at when I have time. I hope to one day have a wildly popular game, but mostly enjoy talking with players, solving problems, and building something that isn’t subject to the deadlines and compromises I face in my day job as a software developer.

I was recently re-reading Christopher Alexander’s A Pattern Language, which he wrote in the 1970’s as a catalog of recipes for implementing his architectural philosophy. I understand from architect friends that Alexander was required reading for architecture students for many years, and that he is revered and reviled in equal measures in his field. I was first exposed to his work as the inspiration for another book, Design Patterns: Elements of Reusable Object-Oriented Software, which has had a major impact onthe field of software engineering.

More than forty years since its publication, A Pattern Language is like reading well-aged science fiction–equal measures of prescience, wisdom, and things that turned out to be completely wrong. I love it for its breadth (Alexander covers everything from how big a city should be to where to place chairs in your living room) and for the way he weaves advice about how to live with advice about where we live.

In pattern 156 Settled Work, Alexander suggests that we start developing a productive avocation for later life, long before we actually retire. Within that he says “… make the workshop open to the street, a part of local street life …” I live on a dead-end street with very little life, so I have decided to go with the modern equivalent and write an occasional blog about World Tank League and other projects I am working on.