Be Like Buffett: Investing in the Dip

Disclaimer:  The article below is meant to discuss the potential upside of purchasing stocks in a downmarket.  In no way is this a call to invest in these, or any stocks at this time.  Any investments are done so at your own risk.  Please invest wisely. 


 The hysteria over the coronavirus outbreak has gotten a litany of reactions over the past few weeks, progressing from ignorance to panic.  From an ‘overhyped cold’ to ‘no TP for my bunghole

I am not here to downplay the seriousness of this outbreak; coronavirus has the globe shook right now.  The death toll and rate of infection rises every day.  If you want to witness the gravity of this, look no further than mayor of Bergamo, Italy Giorgio Gori’s remarks about not being able to cremate the bodies of the deceased fast enough.  The wave is sweeping over the great oceans into our own backyard where even best estimates has millions infected and the casualties in the hundreds of thousands.  This virus is scary. 

 Yet, just like the toilet paper shortage, people tend to overreact and if you’re one of those, always look on the bright side of life types of people, well here it is: pollution is down, wildlife is returning and an opportunity to make a good return-on-investment exists without looking like those jackasses up-selling hand sanitizer in Tennessee.

Without going too deep into macroeconomics, the precedent set in the 2009 crisis said that major companies were “too big to fail”.  This sentiment was furthered by the recent passing of the $2 trillion stimulus package.  One thing I can promise is that our economy, with the backing of the U.S. government, will not fail due to this crisis.  

So, why has the stock market dropped for the last two weeks, jumping only in the last several days and at a fraction of what it once was?  Two reasons have prompted this drop: panic sell-off and position protection. The latter is one that happens frequently in a dip and can drive the market down, but it’s not what is causing companies to lose 60-70 percent of their value. That would be the former; panic selling. 

There’s no reason behind a panic seller, it’s often people close to retirement, watching their life’s savings plummet, or parents who have invested their child’s college fund.  Before I continue, I want to make it clear: investing now is not capitalizing on their misfortune—these decisions have already been made. This is why the stock prices are so low. It is the work of a savvy investor to simply identify a dip and take advantage of the market’s vulnerable state.

Here the gameplan: take a couple hundred dollars that would have otherwise gone to your nearby city’s watering-hole, or the month’s worth spent on take-out and throw it at some of the hardest hit stocks on the market—travel and entertainment.  You did your research and selected companies that had huge growth potential before the crash: JetBlue, Hertz, and Disney.  Let’s focus on a few stable, established companies just to see how smart that decision turn out to be six months, a year or five years down the line.  The following numbers are based off an investment of $500 in the individual stock. 

HERTZ

 (HTZ):  Yeah, the rental car company.  Hertz has been slammed by the COVID-19 outbreak as travel has been halted for the time being.  As I am writing this article, Hertz is trading at $7.75, a 63% drop from its 52-week high of $20.85 a month ago.  With a $500 investment—and a return to normalcy—you would walk away with $1,334.  Now, if you let that sit for a year and Hertz continues its downward trend of years past, even at a decrease of 5% you could still be walking away with a total equity value of $1,267

 Net Gain: +$767 over 1 year 

 

JET BLUE

(JBLU):  Have you stepped outside lately?  The birds are chirping, the bees are buzzing and as Punxsutawney Phil would predict a month ago we indeed have had early signs of spring. Missing from the spring is overhead jet traffic.  JetBlue, among other airlines during this time, has cut back its schedule to essential flights only as terminals sit empty. The revenue loss is real, but the idea that JetBlue has lost 47% of its value is not.  A $500 investment could yield 42 shares of an expanding airline.  JetBlue has a lot of growth potential beyond this dip.  Looking to push into the European markets, the company’s value should only rise in the years to come.  Getting back to its pre-dip would result in $909 in equity.  However, JetBlue’s real upside is it’s long-term.  In the next 12 months, analysts have JetBlue selling at $23 a share. It is hard to project much beyond that, but assuming a growth in line with market norms over the next four years of 8% annually, see’s the airline soar to $33.79 per share, leaving $1,419 in your pocket

 Net Gain: +$919 over 5 years 

 

EXXON MOBIL

(XOM):  Travel isn’t the only industry taking a beating in this economic downturn. Plenty other businesses are feeling the burn too, including gas and oil companies.  Exxon Mobil has dropped a hefty 55% from its yearly high.  Once again, assuming the market bounces back, this is an increase in stock value up to $1,119. Furthermore, Exxon Mobil may be a slow grower, but this is not a stock to purchase for its growth, this is a dividend stock game. Dividends pay out money each year based on how well the company does.  Exxon boasts an unheard of dividend yield of 10.6%.  Even if the stock never rises past its $83.49 high, netting $118 from them every year isn’t a bad bet. Reinvesting that each year, boosts its output to $1,851 in year five

 Net Gain: +$1351 over 5 years 


The numbers above represent conditions that are ever-changing, but I tried to pick realistic options.  I did, however, make assumptions such as the stock market continuing to rise at a pace similar to this global pandemic.  Regardless, one of the richest men in the world, self-made billionaire Warren Buffett shares a similar sentiment “Be greedy when others are fearful.”

Buy the dip!

Lastly, take this advice with a grain of salt. The market is as volatile as it’s been in 100 years—it can make winners but it can also break losers.  After all the optimism expressed, I leave with a warning: the promise of fortune can be enticing, especially when playing with $5,000 rather than $500. But be realistic with your finances and never bet money you can’t afford to lose.  To steal another quote from Buffett: “live by your inner scorecard.” 

Now someone go tell the Senate I need my student loans forgiven while they’re at it.