How I Traded the Coronavirus Panic

The Week: Morningstar columnist Rodney Hobson says there are no financial winners from coronavirus, but the stock market collapse has unearthed some opportunities

Rodney Hobson 28 February, 2020 | 9:38AM
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The coronavirus scare is a black cloud with no silver lining. Please excuse me for looking at this from the investment viewpoint – this is, after all, an investment column – but it is hard to think of a single company that will benefit from the human misery except, perhaps, one that finds a vaccine. Even then the financial boost will be shortlived.

The only consolation for investors is that the staggering stock market collapse has dragged down the good with the bad, so quite a number of companies look undervalued. Investors should be hoping to buy in at lower levels, not seeking to panic sell after the damage has been done.

The FTSE 100 has fallen from over 7,500 points to around 6,800 points in 11 trading days. That’s a drop of more than 9%. Forget the headlines proclaiming that leading shares lost £95 billion in two days. That figure is meaningless. What matters, and what is comprehensible, is how many pence individual company shares have lost.

In these circumstances it’s a good idea to look at the immediate reaction to company results announcements. For example, mining group Rio Tinto (RIO) produced decent full year figures for 2019 with underlying earnings up 18% and strong inward cash flow. The dividend total was admittedly reduced from US$5.50 to US$4.43 but the final dividend was actually a record $2.31.

As a shareholder, I felt that the market reaction, with the shares promptly crashing to a 12-month low, was extreme and based purely on the general market collapse that morning. I mentioned on my Twitter account @rodneyhobson that I was thinking of topping up my holding but went to brew a cup of tea while I thought about it. By the time I got back the shares were – just – in positive territory so the opportunity was missed.

Looking at Taylor Wimpey, Meggitt and WPP

Then there was Taylor Wimpey (TW.), another of my holdings. The shares fell 4%, another overreaction, though one that was slightly more justified. The shares had run ahead of themselves in the second half of last year, from 143p to 236p, and were already running into a correction before this week’s stock market carnage.

Also, profits were squeezed by rising building costs and flat house prices. However, the underlying picture is sound and the shortage of housing in this country persists, so I am happy to hold. The new year has started well, with a good level of customer demand and the general election outcome has improved confidence among housebuyers, the company says. It is set to raise the dividend total this year.

Engineering company Meggitt (MGGT) was also well down from the January high before issuing results. As it specialises in aerospace components it was affected by the grounding, and subsequent loss of orders for, the Boeing 737 Max.

Even so, underlying profits for 2019 were up 8% and the dividend was raised 5%. The organic order book has grown by 10% and free cash flow has soared.

Only six weeks ago the shares looked as if they would storm above 700p; they are now trading around 550p, a fall of more than 20%. Meggitt is a lot more than just the 737 Max. Planes will still be built despite the short-term impact of the coronavirus on air travel.

Advertising giant WPP (WPP) has been through much turmoil surrounding the departure of founder Sir Martin Sorrell and results show no sign yet of the promised turnaround. Revenue and profits were down in 2019 and are likely to be flat this year.

The shares are down from £10.77 at Christmas to 760p now. I decided to break with my normal cautious approach to investing and to take a modest stake. I’ll soon find out whether I have caught the falling knife.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.