These days, analysts can’t meaningfully gauge the intrinsic value of businesses because of the impact of the coronavirus.
Uncertain times for the TSX Index
If it turns out that an effective vaccine is discovered sooner rather than later, or another breakthrough drug comes from out of nowhere (in the highly uncertain world of biology, such breakthroughs can happen at any moment), a majority of TSX Index stocks could prove to be at a massive discount today.
But if the pandemic drags on for another few years or lasts longer than the Spanish Flu pandemic of 1918, a worst-case scenario, stocks could prove to be significantly overvalued at this juncture.
Few things in this world are more uncertain than biology. Not even the best epidemiologist in the world can predict with any degree of accuracy when the pandemic will end.
In the face of such massive uncertainties, it only makes sense to stay the course, acknowledge that anything can happen, and not attempt to speculate on hard-hit stocks with the assumption that the coronavirus will be gone by year-end.
Take a page out of Warren Buffett’s playbook on how to invest through the coronavirus pandemic
It’s become tough to gauge the intrinsic value of stocks. That’s a huge reason why Warren Buffett is sitting on the sidelines and is readying his firm’s Fort Knox-like balance sheet for a potential worst-case scenario.
If it turns out that the coronavirus is eradicated sooner rather than later, he’ll look foolish (that’s a lower-case “f”) for not having put a majority of Berkshire Hathaway‘s cash hoard to work. But if worse comes to worst and this coronavirus sticks around for years, propelling the world into a depression, Berkshire will be one of the few firms that will have its swimming trunks on when the tides go out.
In the era of coronavirus, it’s essential that investors buy what they know.
Of course, proper diversification, a sufficient emergency fund, and a defensive positioning will also play a key role in riding out the coronavirus “typhoon.” But a major mistake that many investors may be making is buying stocks that they can’t value just because the price has fallen significantly, and concluding that it can’t possibly fall farther.
That’s a mistake because any stock, especially one at ground zero of the coronavirus pandemic, could continue falling deeper and deeper into the abyss. Just look to Warren Buffett, who parted ditch airline stocks and took a massive loss.
What’s an example of a stock that is easy to value in the coronavirus era?
Consider shares of Hydro One (TSX:H), a boring highly-regulated utility that essentially has a monopoly over Ontario’s transmission lines.
For Hydro One, being a monopoly is a double-edged sword. Highly regulated cash flows and a huge moat make for ridiculously certain cash flows that will hold up, regardless of what ends up happening next with the coronavirus.
But due to various regulations and hurdles, Hydro One can only increase prices at reasonable rates within reasonable time frames, acting as a dampener on earnings growth. The Canadian regulatory environment just made Hydro One a ridiculously boring stalwart that’s the epitome of a bond proxy.
Although the firm’s growth is weak, the stock is looking like a significant bargain in times of considerable uncertainty. When you think of it as a bond proxy and not as a stalwart, the Hydro One story makes a heck of a lot more sense.
Shares currently sport a 3.9% dividend yield and will be growing at a decent rate while the rest of the market normalizes dividend reductions.
Don’t wait for the TSX Index to bounce back before buying. If you spot a bargain, scoop it up. Just make sure you can value the name given the unprecedented uncertainties brought forth by the coronavirus; otherwise, you may be speculating without even knowing it.
Stay hungry. Stay Foolish.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares).