Coronavirus Opportunity and Risk: Industrials, Energy, and Basic Materials
Our analysts discuss where they see value in their sectors today.
|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
Coronavirus fears have pummeled U.S. stocks. The market lost more than 11% last week, and despite a notable comeback on Monday and a surprise 50-basis-point interest-rate cut on Tuesday, stocks haven’t yet found reason enough to stabilize.
In which sectors and among which stocks are coronavirus fears perhaps overdone? And as a result, where might investors find opportunity?
We asked our sector directors to share what impact the coronavirus outbreak may have on their particular pockets of the market and which stocks look like good opportunities after the sell-off.
Here’s what our industrials, energy, and basic materials specialists had to say. See what our healthcare and consumer directors think, as well as thoughts from our technology, media and telecommunications, and financial services teams.
Industrials: Brian Bernard
The sector has material exposure to coronavirus, either through potential supply chain disruptions and/or weakening economic activity in affected regions. We’ve already seen quite a few warnings from companies across our coverage.
Coronavirus fears have battered the stocks of 3M (MMM) and Honeywell (HON). These companies are two of the largest manufacturers of personal protective equipment. While virus-related concerns will cause supply chain disruptions and may delay orders, sales of respirator masks could serve as catalysts in their undervalued stocks.
We think Deere (DE) could be an interesting investment at the right price, given its U.S. focus, dispersed farmers, and the fact that its U.S. customers have already taken the brunt of the China trade war.
Analysts Joshua Aguilar and Scott Pope contributed.
Energy and Utilities: Dave Meats
Energy in general is going to be heavily affected by the coronavirus outbreak, as demand for commodities could fall sharply and export demand affects volume-sensitive shippers that are otherwise less affected by price changes. For more, see “Market Overstates Coronavirus Impact on Energy Stocks.”
We think that utilities are less vulnerable to a coronavirus outbreak. Lower commercial and industrial loads could be offset by higher residential loads if people start staying home. However, if people are staying home, they aren’t driving, and that means less electric vehicle demand for electricity (although that’s currently a small component of overall demand). If factories need to close, industrial loads will suffer more, but industrial generation is lower margin. And this is only a risk if the utilities aren’t decoupled from usage. Long-term capital plans would remain unchanged.
Senior analyst Andrew Bischof contributed.
Basic Materials: Kristoffer Inton
Much of the sector might be threatened by continued coronavirus spreading, but we see a few bright spots where moaty companies are trading at attractive valuations.
O-I Glass’ (OI) stock fell significantly and is trading about 44% below our fair value estimate. Sales of glass bottles have very low cyclicality and could rise if people are forced to eat in more often and eat out less.
Compass Minerals’ (CMP) stock fell along with the market and trades about 31% below our fair value estimate. Use of deicing salt, which generates almost 75% of profits, is driven by snowfall, not economic conditions. As such, deicing salt will continue to be needed whenever it snows in Compass’ Midwest footprint.
Corteva (CTVA) is trading about 29% below our $40 fair value estimate. The company mostly manufactures seeds and crop chemicals locally, reducing its exposure to international supply chain disruptions. Corteva’s largest market is U.S. farmers, who account for around half of revenue. Following 2019, which saw the lowest number of U.S. acres planted in over a decade, farmers are expected to plant more crops this year, which should translate to sales and profit growth in 2020.
Consumer staples companies represent most of Sensient Technologies’ (SXT) client base, and volume should be relatively steady amid coronavirus concerns. We think the stock is about 23% undervalued.
Strategist Andrew Lane, senior analyst Charles Gross, and analyst Seth Goldstein contributed.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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