Has the coronavirus got you thinking about investing? If not, maybe now is the time to get involved. Because without a doubt we are living in a ‘once in a decade investment opportunity’, most of us have more free time than ever and I’ve never seen the media talk this much about finance since the GFC.
In the stock market, blue-chip stocks are the most reliable, financially stable and biggest businesses on an index. Blue chips like Qantas (ASX: QAN) , the Big Four Banks, and Wesfarmers (ASX: WES) are known for a high share price. Because many investors want to own a stable business, ultimately driving the price up. You will rarely see a blue-chip stock like Qantas trading below its fair value. If you do, there is always a catch. It’s like the phrase there is “no such thing as a free lunch”
In a nutshell, the coronavirus is driving down fundamentally strong stocks to a 1/3rd if not half of their true value. In turn, investors see the coronavirus as an opportunity to snap up quality blue chips for a fraction of their price. The strategy is to invest, hold for a few years and then cash out with a healthy return.
Now yes, there are other coronavirus strategies these include:
- Investing in inverse ETF’s
- Investing in Gold
- Snapping up quality yet extremely cheap penny stocks
- Riding the waves of trending stocks throughout the virus (Hand sanitiser, toilet paper stocks, COVID-19 Vaccine companies)
However, for a beginner, I would recommend the blue-chip strategy.
Qantas is being talked about by most investors as one of the best blue chips on sale during the virus. Now, Qantas is trading at $3.25. Which is at a 55% discount to its share price of $7.15 back in January 2020. Thus, making it no surprise that investors see the airline giant as an attractive investment.
Today we are discussing why such as strong stock like Qantas is down 50%, what caused QAN to surge 20% on Wednesday and whether the Airline giant is worth the investment?
Why is Qantas down 50%?
The coronavirus is wiping multiple years of growth off our Aussie blue chips. However, it is fair to say that Qantas is feeling the brunt of the coronavirus carnage as travel restrictions become more stringent. COVID-19 is forcing Qantas and Jetstar to make radical changes both domestically and internationally.
1) International changes
- All international flights leaving Australia are suspended from the end of March to end of May
- International flight capacity cut by 90%
- JetStar Asia (Singapore) will suspend all flights from 23rd March to at least 15th April 2020
- Jetstar Japan has suspended international flights and cut domestic flying
- Jetstar Pacific (Vietnam) has suspended international flights and will significantly cut domestic flying
2) Domestic changes
- Qantas and Jetstar are reducing flight capacity by 60% which will have a domino effect on flight frequency
- Routes are being suspended in line with the government’s lockdown measures and travel restrictions
- Qantas and Jetstar will stand down 20,000 out of 30,000 employees at least until the end of May 2020
Remember the point I always reinforce is that the stock market is based on one thing, expectations. The measures above will undoubtedly weaken Qantas’ financials. Thus, investors are selling off their shares because they expect Qantas to report significantly weaker earnings in March, June and possibly September.
Moreover, every announcement that the government or media makes on new travel restrictions, coronavirus deaths and cases or even lockdown techniques infect the market with more fear. Thus, it is a horrible mix of fear and negative expectations that is driving down the Qantas share price.
What caused QAN’s 20% growth on Wednesday?
Despite the negative outlook, Qantas’ shares jumped 20% on Wednesday. Why? Because Qantas secured an additional $1.05 billion in funding. The extra liquidity will provide much-needed assistance for the international carrier as they navigate the business through the Coronavirus outbreak.
Wednesday’s funding announcement increases Qantas’ available cash balance to $2.95 billion. In turn, Qantas can draw on their cash balance to sustain the longevity of the business. But how long until the cash runs out, is a concerning question?
However, it seems that the managements financial acuity over the past few years, will come in handy over the next few months. Which is reinforced by Alan Joyce as he said “Over the past few years we’ve significantly strengthened our balance sheet and we’re now able to draw on that strength under what are exceptional circumstances. Everything we’re doing now is focused on guaranteeing the long-term future of the national carrier, including making sure our people have jobs to return to when we have work for them again.”
Is Qantas worth the investment?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Now while it is all well and good to know why Qantas is down and why their shares surged this week these events are a thing of the past.
Personally, I see Qantas as an attractive investment for two reasons.
Firstly, millions of Australians count on Qantas, alongside Jetstar, for holidays, business travel or simply just connecting us around the world. When certain businesses are the ‘life-blood’ of an economy the government usually intervenes in an economic crisis to ensure the company remains afloat. Just like our reliance on the Big Four banks saw these financial institutions receive a $115 billion bailout from the government.
Qantas and Virgin have already expressed the need for financial assistance from the government, so they can recover from the COVID-19 crash. Thus, the importance of Qantas and Jetstar to the Australian economy means there is a high chance they will still be left standing.
Secondly, I see the opportunity to get into Qantas as just too attractive to pass up. When should you get in? Because the last thing you want to do right now is jump the gun. The current price is too high for me. Because a) it is off the back of a strong week of trading and b) we know QAN’s resistance level is $2.14 (share price last Thursday).
Source: Google search QAN ASX
I expect Qantas to fall even further. The travel restrictions, likelihood of poor March financials, and the coronavirus fear should drive down the price. Thus, providing us ample time to snap up shares at a great price.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.