These Tech and Consumer Stocks Have Largely Underperformed the Market — ICYMI

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Some tech and many consumer discretionary stocks have badly underperformed an already horrid market in 2020, as consumer spending has fallen off a cliff, causing advertiser spending to do the same. Estimate revisions downwards have been drastic in the advent of the coronavirus.  

Below is a list of stocks that have gotten crushed beyond belief, as sales fall and fixed costs pressure margins. Some companies have also cut back on stock buybacks. 

The S&P 500 is down about 13% YTD and 18% since February 19, bouncing back from late March lows and looking past 2020 troubles.

We’ll start with tech. 

The coverage universe at Goldman Sachs’ tech analyst team has seen an average stock drop of 25% since February 19 to date, an EBITDA estimate decline of 17% and an enterprise value-to-EBITDA multiple contraction to 14.1 times forward one-year estimates from 15 times. That’s according to a note from Goldman’s tech team. 

Sales revisions range from -10% for Facebook and Alphabet, all the way to -24% for Lyft.

Here’s where those stocks and more find themselves in 2020:

  • Facebook: -15.6%
  • Google: -7.1%
  • Twitter: -17.1%
  • Snap: -21% 
  • Uber: -8.4%
  • Lyft: -36% 

The analysts said that most of these companies, while experiencing negative free cash flow to start the year, are in a good enough liquidity position to weather the storm of the virus before debt payments and other liabilities become an issue. The analysts said most of these companies’ cash and marketable securities amount to 2 times their short-term liabilities, with internet companies enjoying a particularly low debt burden. 

These dynamics support companies’ ability to borrow at lower interest rates, which is supportive of valuation.

Cowen‘s food and consumer discretionary analyst Andrew Charles shows how ugly things have gotten for food and restaurant companies.

Some of his food stocks are seeing same-store-sales revisions for 2020 down by 20%. 

Meanwhile, EBITDA margins are shrinking to scary levels. In 2019, McDonald’s  (MCD) - Get Report, Wendy’s  (WEN) - Get Report and Dunkin’ Brands  (DNKN) - Get Report saw EBITDA margins of 11.6%, 11.5% and 17.3%. For 2020, those companies are looking at margins of 2.8%, 0.2% and 2.4%, in the same order. 

Other stocks Charles still has some concern for are Domino’s DPZ, Papa John’s  (PZZA) - Get Report, Chipotle  (CMG) - Get Report and Starbucks  (SBUX) - Get Report

As for EBITDA multiples, Charles’ coverage universe has seen a contraction to about 23.8 times forward estimates from 26 times since February 19. 

Here’s where these stocks year-to-date:

  • McDonald’s: -9.6%
  • Wendy’s: -23.5%Dunkin Brands: -24%Domino’s: +26% (TheStreet may find out why soon) 
  • Papa John’s: +4%
  • Chipotle: -6.63% 
  • Starbucks SBUX: -16.7% 

These tech and consumer discretionary stocks, holistically, could outperform the broader market when or if it rebounds to levels prior to the Covid-19 outbreak, as expected earnings levels may stabilize in 2020 and then fully rebound by 2021, at some point. The extent to which lockdowns are eased is the key factor there. 

But stocks may come down before any sustained and meaningful rally. For S&P 500 companies, analysts polled by FactSet have reduced earnings estimates by 12% year-to-date, while strategists, who don’t try to count every last penny of earnings and cash flow, point out that macro conditions point to an earnings expectations decline of between 20% and 40%. 

Many on Wall Street are looking for stocks to drop hard again in the near-term, or at least stay range bound while earnings estimates catch up to prices. 

Charles, who expresses concern about valuations in his universe, explains one reasons why analysts haven’t updated their models since March:

"We have not changed estimates since this time [mid March] for companies that have not provided a business update.”

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