The stock market has absorbed the disruption of COVID-19 and a global recession almost as if nothing has happened. As of last weekend, the S&P 500 was up 5.2% over the past year and the Dow Jones Industrial Average was only down 1.9%, following a rapid recovery after both indexes dropped 30% this spring.
But the market could crash again if there’s a second wave of COVID-19 and a lasting economic impact from the virus. If it does…
Few companies have had their businesses disrupted as much as Disney. Theme parks were shut down around the world and movie theaters have largely closed, cutting off the lucrative box office. As a result, nearly half of the company’s business has been disrupted.
But at the same time, Disney launched Disney+, which could be the future of its business. Over 50 million people have already subscribed to Disney+, and that was a number revealed in early April — it has likely grown as the pandemic went on. That’s an incredible number of subscribers for a new service, but it’s just a piece of the company’s streaming strategy. ESPN+ and Hulu are also majority-owned by Disney and can be packaged with Disney+ to create a full streaming offering.
While streaming will keep revenue coming in during the pandemic, the company is still set to thrive when the rest of the business opens, even if it takes a year or more to get back to normal. Theme parks still have some of the world’s best media assets driving experiences. And movies generate value from theaters to network TV to streaming and theme parks. Streaming provides a path to the future for nearly all of Disney’s media assets. Long-term, this is still a media giant I want to own, and if I can get it on sale it would be even better.
Gambling may be one of the hardest sectors hit by the pandemic: Casinos had to shut down for months, and it may take years for the business to return to normal. But when gamblers do return, MGM Resorts will be set to thrive.
MGM owns some of the most valuable property in Las Vegas and Macao. Not only is the property valuable, in Macao the company is one of only six concessionaires even allowed to run a casino. In 2019, these resorts generated $3.0 billion in EBITDA, a proxy for cash flow coming from resorts.
MGM will no doubt have a tough year because of COVID-19, but a recent $750 million debt offering should create a bridge to the other side of the crisis. And when business returns, this stock could be a steal if we get a discount from the current $9.4 billion market cap.
My extremely long-term play in this list is Virgin Galactic. The company is building spacecraft that will take normal consumers into space in the course of point-to-point terrestrial travel. Think of it like an airline, but for those with the need and means to travel extremely quickly around the world — for example, a 12-hour flight from LA to Tokyo could be cut to 2 hours by Virgin Galactic.
The price tag to board the spacecraft is steep, currently at $250,000 per flight. But if we think out a decade or more this could become a normal mode of transportation. Management expects 270 flights per year by 2023, and as flights increase we should see costs come down and the number of destinations increase.
Disruptions taking place in the economy today should be little more than a blip for Virgin Galactic as it tries to disrupt travel. The company is serving the ultra-wealthy, and has a long-term horizon for growing its business. And with $419 million in cash on the balance sheet and deposits from more than 400 people, this is a growth stock I want to own long-term.
If Vail Resorts can survive the next year, it’ll arguably be in a better position than it is today, and I am looking to get into the stock at an even more discounted price. The company’s resort network has a strong competitive moat because the company owns properties and mountain resorts that are limited by the natural geography. 2020 will likely be slow, but as seasonal vacationing returns, so will business.
I think this is also a company that will find a way to limp through the next year in order to survive. Amenities like restaurants and clubs may be closed in resort towns, but skiing and snowboarding outdoors and then either driving home or going to a hotel room looks like it’s much lower-risk than a lot of other activities people can do right now.
Vail Resorts was able to generate about $300 million in net income per year before the pandemic, and if we use that as a proxy for future profits I think the stock would be a steal below a $4.5 billion market cap (or a 15 P/E ratio). If the market crashes again and shares end up near $115 per share, this is a stock I would jump on.
Be ready if the market provides an opportunity
The market can be irrational on both the…
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