The Economy – Whistling Past the Graveyard

Over the past several weeks, we have warned that the economy is at a crossroads, and investors are underestimating the risks in the economy and capital markets. The stimulus money that has helped support small business and consumers has run out. Congress has been unable to reach a deal for additional stimulus. Now, as 15 million workers remain unemployed with little income, the bills are going unpaid. In the absence of additional stimulus, economic growth will decline. Layoff announcements are increasing and furloughed workers remain sidelined. As tax collections decline sharply, the financial position of state and local governments is quietly deteriorating this year. In addition, the commercial real estate market around the country is under stress as renters seek forbearance from monthly rent obligations. We currently do not have sustained economic growth and the economy needs a comprehensive fiscal stimulus plan to support it through the pandemic.

Five Stocks to Weather the Storm - Revisited

In early April this year, we put together a five-stock portfolio that we thought would help investors to weather the storm of the COVID-19 pandemic. At that point, we didn’t know how long businesses would be locked down, the severity of the pandemic on businesses or its impact on the financial markets. Here is an update to the five stocks we recommended. (AMZN)

The price of (AMZN) has increased from 1847 at the beginning of the year to 3401, providing investors with a return of 84.10%. The company has executed on both the on-line retail business and its cloud services business.

AMZN has gross margins of 40% and operating margins near 5%. With Debt/Total Assets of 34.5% the company has a fairly conservative balance sheet. With a market value that has now grown to $1.7 trillion, the debt to equity ratio has declined significantly. We expect the company’s earnings to be between $30 and $32 per share. The company has been firing on all cylinders, with double digit growth in both cloud services, only shopping, and whole foods. At the current price of $3401 per share, AMZN stock trades at a P/E of 55x earnings and 5x sales per share. The stock is trading relatively expensive but we believe over the next 2 years the company will continue to grow into their current valuation. The company has been aggressive at building out its logistics infrastructure including investment in transportation and warehouses across the country. We believe this company is well positioned for an economic downturn and recovery and continues to be one way to build defense into an equity portfolio.