December 21, 2018

Breakingviews: Doomsday just another opportunity to create alpha

by Breakingviews.

The world’s richest have long been prepared for the worst, be it financial meltdown, long-term power outages, cyber attacks or pandemic flu. Silicon Valley entrepreneur Sam Altman has an arrangement with billionaire investor Peter Thiel to take a private plane to New Zealand in the event of a systemic collapse, the New Yorker has reported.

The general public can’t join these plutocratic “preppers” in their bunker, but they can still align their stock portfolios in anticipation. Breakingviews suggests some ways to turn anxiety over the end of days into investment alpha.

Kimberly Clark
Toilet paper, toothpaste and diapers will become scarce when delivery systems shut down and grocery-store shelves empty. The $40 billion company sells the bare bones required for the bunker beginner. Trading at around 16.5 times next year’s forecast earnings according to Refinitiv, it’s also more than 15 percent cheaper than the consumer-staples sector.

Caffeinated beverages like Mountain Dew will come in handy when Nespresso machines cease to function. But consumers will mostly scramble for the $155 billion food company’s bottled water, and snacks with shelf life like Doritos chips. Pepsi’s stock is under pressure because of its unhealthy brands. In prepper world, going easy on the sodium isn’t a priority.

Teva Pharmaceutical Industries
The U.S. government recommends a three-day supply of medications in the event of a disaster. Israeli Teva is the largest maker of generic drugs in the world. Shares in the $18 billion company have fallen by about 70 percent from their 2015 highs as regulators attempt to encourage competition and the emergence of a large nonprofit pill producer means multiple sellers risk fetching only bargain-basement prices. Stockpiling of pills would do Teva a power of good.

Planet Fitness
Those bunkers don’t protect themselves. Bare-knuckle brawls are aplenty in a theoretical world without borders, and a gym membership is a good way for the populace to be ready. That gives fresh opportunity for Planet Fitness, whose stock has increased more than 55 percent in the past year as it attracts aspirational exercisers with its low $10 membership fee – having also cut fat of its own, reducing net debt from around four times EBITDA in 2016 to around three times now.

Dick’s Sporting Goods
In 2018, the $3.1 billion U.S. retailer stopped selling assault-style weapons and said it would support the sale of guns that can only be fired by their owner. No one wants to see their firearm in the wrong hands when marauders start roaming. But just as important is that the outdoorsy retailer sells camping equipment – tents, flashlights, water filters, hiking boots – that those setting up in the wilderness will need.

General Dynamics
Sure, there’s hacking to worry about. This $47 billion defense giant offers tech support for government agencies. But just as useful is the company’s ownership of Gulfstream, the maker of private jets, which accounts for around one-third of its operating profit. For those who want to join Thiel and Altman in New Zealand, or try their luck in Chile, it’s worth snagging one of the 120 or so planes General Dynamics delivers per year.

Carolina floods, California wildfires, and Gulf Coast hurricanes all left Americans stranded without electricity for days in 2018. Generac, a U.S. company with a market capitalization of around $3 billion, makes power generators – the type that plug into homes and businesses when the grid goes out – and sells them all over the world. Preppers can only live so long on campfires and flashlights.

Farmland Partners
The $160 million real-estate investment trust with land in Colorado, Nebraska, Kansas, and Louisiana typically leases to farmers to grow dozens of major U.S. crops. That will be a valuable asset in a time of crisis. What has been used for growing corn could also turn into camping and hunting land, and at a reasonable price. Farmers have been hit hard by the recent trade war, which is reflected in Farmland’s stock price, down more than 40 percent in 2018.

IShares Gold Trust
Forget cash once banks are gone. And though the mistrust of governments that underpins cryptocurrencies is shared by many preppers, it doesn’t help if the internet is compromised. So it’s back to the most basic world currency: gold. And while the prepper may stock up on gold bars, the prepper portfolio will do just fine with an ETF whose value is tied to the commodity.

The $110 billion construction and packing company makes duct tape, which fixes everything.

Stocks to short
Daily life indulgences and status symbols aren’t quite so important when judgment day looms. Think Prada’s luxury handbags, Lululemon’s fancy yoga clothing, Starbucks coffee and Rolls-Royce cars. Investors considering a long-short strategy for the after-times know where to look.

(Additional research by Varada Bhat. This is a Breakingviews prediction for 2019. To see more of our predictions, click here.)


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