With the coronavirus pandemic yet to peak, analysts are struggling to make forecasts for company profits and their previous estimates can be disregarded. We are certain to see a major global recession due to the shut-down in economic activity as countries around the world place constraints on trade and movement to fight the spread of the virus.
- Our growth at right price (GARP) screen could be viewed as largely redundant in this situation, as there is little growth to forecast until businesses and consumers can return to more normal behaviour. That said, there are pointers to be taken, given the screen also looks at several backward measures of EPS growth and some of the companies that have been profitable in recent years are now cheap.
- Of course, the giant caveat is that some of the companies that were doing well are highly cyclical and may suffer horribly in the recession. Even those that are less cyclical could need to see a strong recovery, to return to meaningful profits growth, if they have high fixed costs. Buying these businesses right now is a bet on the tide being turned quickly against the virus, and the vast fiscal and monetary stimulus packages putting a rocket under a V-shaped economic recovery.
- Questions to ask yourself when examining the companies that score reasonably well still on the GARP screen, are: 1) How quickly do you think a company's profits will recover, given the nature of its business? 2) Is it looking good on backward measures because of circumstances that are unlikely to be repeated in any potential recovery? 3) Are a high proportion of the business' costs fixed? I.e. think about operational gearing.
- With no reliable signs we may return to normality soon, then if you are drip-feeding money into the market to take advantage of falling prices, it is important to understand and believe in the long-term case for owning the shares.
