Last week, U.S. markets suffered their worst five-day performance since the 2008 financial crisis. And while that might be harrowing for some, investors may want to begin hunting for bargains. While I think many types of stocks are still too dangerous to buy, stocks of high-quality, cash-rich companies that will make it to the other side of the COVID-19 crisis may end up looking like huge bargains a few years down the road.
Specifically, the three companies mentioned here have one big thing in common that makes them beneficiaries, not victims, of last week's market plunge: share repurchases, or “buybacks.”
When a company uses cash to repurchase its own stock, it lowers its share count, thereby boosting earnings per share for investors. Of course, since the company is also using up its precious cash to repurchase shares, buybacks are only beneficial if the company purchases its stock below fair value. That's why last week's stock market plunge will likely benefit the following three names handsomely over the long run.
As many know, Apple (NASDAQ:AAPL) is one of the large stocks that may be most susceptible to a near-term effect from the coronavirus. Not only does Apple have a fair amount of its supply chain assembly in China, but China also accounts for good chunk of Apple's demand. Last quarter, greater China accounted for 14.8% of Apple's revenue.
In a recent press release, Apple told investors that it would no longer meet the guidance it provided in late January. As coronavirus has spread throughout China, Apple noted that its iPhone production was still going, but ramping up slower than anticipated. In addition, Apple noted that it had closed all of its Apple stores, and that partner retail outlets had opened with limited hours with very little foot traffic.
Nevertheless, Apple should eventually get through the other side of the crisis. Results for the December quarter were very strong, and this September should see the release of the first 5G-enabled iPhone. In addition, Apple is sitting on a very comfortable $207 billion cushion of cash, marketable securities, and long-term investments, against only $93 billion of very low-cost debt.
Since the tax reform act of late 2017, management has pledged to bring Apple down to “net-cash neutral” over time, which means lots and lots of share repurchases. Last quarter, Apple repurchased a whopping $20.7 billion of its own stock as the share price surged from the low $200s to a recent high of $327.85 in late January.
Now that Apple's share price has dropped back to the low $270s, its share repurchases will be retiring more shares than they otherwise would have. While there could be some adverse effects this quarter or even the rest of this year from COVID-19, Apple's long-term value shouldn't be affected. As such, share repurchases at lower prices today will benefit shareholders over the long-term.
What's the one thing people need if cooped up at home for days, weeks, or months? A lightning-fast broadband connection, and maybe even (gasp!) a cable TV bundle, with funds that may have otherwise been used for going out to dinner, movies, or vacations. Charter Communications (NASDAQ:CHTR) is the second-largest cable company in the U.S., and the largest “pure play” broadband and cable operator without any large content investments. While the cable bundle has been under pressure from cord-cutting, the needs for high-speed broadband has been surging, and broadband is much higher-margin to cable operators.
Charter has also been buying back huge amounts of its own stock, as management has forgone dividends for 100% buybacks. Since September 2016, Charter has repurchased an impressive 25.2% of its shares outstanding.
Charter has also increased its debt load over the years in order to do so. The company has given itself a net leverage limit of 4.5 times its EBITDA (earnings before interest, taxes, depreciation, and amortization). As the company's EBITDA has grown in recent years, so has its debt pile, which has surged to $78.4 billion, keeping the company's leverage ratio just below the limit at 4.45.
Nevertheless, Charter operates a very steady, almost utility-like business providing broadband and cable against only one competitor in most areas, which allows for high levels of debt. The good news is that its results likely won't be affected by coronavirus. Even better, if interest rates are cut in response to the virus, Charter can refinance some of its debt with lower-rate notes.
Charter has been fairly consistent with its share repurchases, buying back stock each and every quarter as the stock has surged nearly 50% over the past 12 months to a recent high of $546.54 before falling to $493.17 on last week's market crash. That lower share price means Charter will be able to retire more shares from its buyback program, which sets the stock up nicely for further future gains.
Finally, it may be Warren Buffett's conglomerate Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) that stands to benefit the most from last week's crash… especially if this short-term correction turns into something much worse. Not only does Buffett own the aforementioned Apple, which is Berkshire's third-largest business behind its insurance operations and BNSF railroad, but Berkshire is also currently sitting on its own pile of $125 billion in cash and short-term securities at its insurance operations.
The conservative Buffett has been routinely criticized for not participating more in this 11-year bull market. However, Buffett profited handsomely the last time a huge market downturn occurred in 2008-2009, when Berkshire purchased stakes in many large U.S. banks. Berkshire has benefited nicely from those investments over the past few years.
Not only that, but Berkshire has also become more lenient about repurchasing its own stock. Buffett used to have a limit of 1.2 times book value for share repurchases, but he relaxed those criteria in 2018 to allow repurchases at higher prices. Last year, Berkshire executed some marginal buybacks, retiring about 1% of shares, mostly at higher prices than 1.2 times book value.
However, with last week's downturn, Berkshire's stock has fallen to about 1.2 times book value, a level at which even the former buyback regimen would have kicked in. As such, it's highly likely that Berkshire will be repurchasing more of its own stock in the current market meltdown. And if things get really bad, Buffett may unload his bazooka on a new elephant-sized acquisition, which could benefit shareholders even more down the road.