Value investing in the shadow of Covid-19

As the global pandemic spread, no part of the market or globe was spared. And, as a result, global value investors have had their work cut out for them.

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“Really, no geography [and] no company has escaped the impact of Covid[-19],” said John Goetz, portfolio manager and co-CIO at Pzena Investment Management in New York, during a late-May interview.

While developed markets in particular have taken a significant blow due to plunging consumer activity, he said, with many companies “facing revenue and business fall-off that was just unprecedented,” he’s not focusing on country-specific analysis.

“Rather than thinking of it as particular countries being hurt, it’s particular industries which are being heavily impacted, and their stock prices have been really hammered,” he explained. “If you look around the world, the most common theme that we see [for] stocks that are heavily impacted would be anything consumer-related.”

From automotive and industrials to travel, retail and financial businesses, the common hurdle is “figur[ing] out who are the winners and losers,” Goetz said, adding that “many [names] we’re seeing are down 50% to 70%, off their highs over the last three years.”

Two areas that are of particular interest to Goetz are the shipping industry and energy patch.

“Trade was already impacted before the coronavirus, and then [it was] impacted heavily by the decline of demand around the world,” he said. “Just to mention one company there: [Denmark-based] Maersk, which is a leader in container shipping.”

As of late May, Goetz found that Maersk’s business was “way off” target. However, he also said, “What’s interesting is that because they have so many competitors that are weaker than them, we suspect that during the course of this virus, it actually gives Maersk a chance to gain share as some weaker competitors go bankrupt,” and the industry structure changes.

As of June 15, that company’s Series B shares (traded on the Copenhagen stock exchange) were down more than 22% year-to-date but had been steadily recovering since mid- to late-March. Current challenges include earnings missing expectations and the company’s chief executives cautioning against global container volumes taking a plunge.

As for energy names, Goetz highlighted oilfield services companies like Texas-based Halliburton.

The business is “one example of the holdings that we found to be exceptionally cheap during this period of time,” said Goetz, who is a manager of the Renaissance Global Value Fund.

“Their ability to match their cash flow on the spending side to their revenue side is really quite amazing,” he said. “And by that, I mean, they’re able to shrink the business to match the demand for their services,” allowing for “cash flow positivity, even in one of the worst energy environments in the history of energy.”

Halliburton’s shares were down nearly 47% year-to-date as of June 15, but that’s up from a drop of more than 80% in March. Further, recent research suggests the company may be outpacing some peers in the current global environment.

Still, energy-related risks abound.

Not only are people staying home, leading to sliding demand for oil and gas, but also there was “this big power contest between Russia and Saudi Arabia on the supply side. Specifically, both of them [were] increasing production, even as demand was declining.”

That price war ended earlier this month, but oil traders remain wary of future prices.

As Goetz pointed out, there was “a record event [in April] where crude oil futures traded negative, which has never happened before in the history of [those] futures trading. This tremendous event […] created carnage throughout the oil industry, particularly [for] oil-service companies. Their revenue has been impacted by the decline of spending, as particularly the oil demand for shale in the United States has collapsed.”

The Dow Jones U.S. Oil & Gas Index had year-to-date returns of -34.85% and one-year returns of -33.44% as of June 15. Meanwhile, the S&P/TSX Equal Weight Oil & Gas Index was -32.81% and -29.69% for the same periods, respectively.

As Covid-19-related effects continue to weigh on the market, Goetz will focus on companies that are interesting, dynamic and significantly undervalued.

Overall, he said, remember that “if you look back at all the recessions we’ve had in the last 40, 50, 60 years, none of them have seen the impact on business that the shutdown orders have created,” meaning that monitoring volatility is crucial.

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