Wondering What To Do? Here’s My Plan…

I’ve had to rewrite the intro to this month’s update to High-Yield Investing several times.

I started last Friday, which was another ugly day for the market. I got to the office and was rudely greeted by a lot of digital red ink on my screen – not surprising, with the Dow tumbling another 800 points. At the time, I was thinking these 1,000 point declines were almost becoming a daily occurrence.

But the bears took it up a notch this week. On Monday, the Dow tumbled more than 2,000 points (8%) within minutes off the opening bell, triggering protective circuit breakers to halt trading. Adding to Wall Street’s angst, an oil price war between Russia and Saudi Arabia broke out, leading to the steepest plunge in the energy sector since the 1991 Persian Gulf War.

Normally, a 5% price swing is a sizable move in the oil market. But benchmark U.S. crude prices collapsed by 34% at one point, plunging below $30 per barrel. In one day, all of the gains since the last market bottom in 2016 were erased.

We’ll get to the ramifications of that soon enough.

Then, on Tuesday, the market recovered about half of those losses. And just as we all let out a collective sigh of relief, we saw more drops (and circuit breakers) yesterday and today.

So what are we to make of all this? Well, here’s what I told my High-Yield Investing readers…

Throwing Out The Baby With The Bathwater

I find it curious that General Motors (NYSE: GM) and slot machine maker International Game Technology (NYSE: IGT) tumbled 15% and 30%, respectively – as if people will never again gamble or buy another vehicle. I don’t see any shorter drive-thru lines at the Golden Arches, yet McDonald’s (NYSE: MCD) backtracked from $215 to below $175.

Even Enterprise Products Partners (NYSE: EPD), a reliable all-weather performer with 62 consecutive quarterly dividend hikes, fell more than 25% in just two days. It’s hard to comprehend a sturdy and profitable business surrendering a quarter of its market value – without committing any transgression – just because Mr. Market woke up in a sour mood.

But here’s what really surprised me. Friday’s biggest loser, down about 10%, was H&R Block (NYSE: HRB). Huh?

Now, some of these prices have gone down even more on Tuesday and Wednesday as I write this. Some of it is completely irrational. Still, I think we can all acknowledge the financial punishment the coronavirus is meting out on some industries… Travel, shipping, even retail.

But tax assistance isn’t exactly in the crosshairs. I don’t think Uncle Sam will relieve anyone of their filing obligations, even if they are sick. Delay? Maybe.

Nobody knows how far this outbreak will spread over the next few weeks. But there’s one thing I can count on: every working American will still have to send in their 1040 tax return at some point. And robust job creation has put millions of additional workers on the payrolls.

Less than two months ago, HRB shares were trading near $25. Today, they are around $16 – driving the yield past 5%.

Some of that selling likely stems from a mixed third-quarter earnings report (revenue came in above expectations, but earnings missed). But I don’t buy that the double-digit decline is earnings-related. The stock was only off about 4% in after-hours trading last Thursday — after the results had been announced.

H&R Block just reaffirmed its full-year financial outlook. The company will help more than 20 million clients file their tax returns, likely gaining market share for the third straight year.

The Takeaway

But this isn’t really about HRB. I might even sell the stock sometime soon. Not because the company is suffering, but simply because this massive upheaval has suddenly unearthed other candidates with greater near-term potential.

That’s what happens during these indiscriminate market bloodbaths. Investors sell first and ask questions later. Trading is based on emotion rather than fundamentals. And that’s why, once the dust settles, there are great bargains to be had.

This is not the same market we’ve been used to lately. But here’s the bright side…

We’ve dealt with these scares before. Remember SARS? Avian Bird Flu? Swine Flu? Ebola? Zika Virus? Coronavirus may be more virulent, but it too will run its course. In the meantime, I have raised my liquid cash position over at High-Yield Investing to more than $20,000 – the most in years.

And I’m selectively putting some of that cash to work, starting with a couple of small buys just recently. I will look to strategically make new additions when the time is right. Stay tuned… (And to stay completely up-to-date with the opportunities we’re finding, go here to learn more about my premium service.)