This market crash undoubtedly presents an opportunity to buy some good quality companies trading on cheap valuations. After all, the FTSE 100 index has shed around 30% of its value since the start of the year.
However, caution must be exercised in a market crash. Some stocks are clearly cheap for a good reason!
It’s almost inevitable that some companies will fail to make it through the turmoil to a smooth recovery. In fact, many that have been particularly hard hit may struggle to recover for months or even years. Some could go bust.
With that in mind, here are two stocks that I believe investors should be wary of, due to the financial impact of Covid-19 on their business.
A gloomy outlook for the property market
The UK government has recently urged anyone buying or selling property to delay moving. This comes as the wider housing market struggles to cope with the effects of the coronavirus.
Rightmove, the UK’s largest online real estate website, has warned that sales have started to fall through. The housing market is facing a sharp slowdown in activity caused by house buyers’ uncertainty over the pandemic.
This is bad news for UK housebuilders, especially Taylor Wimpey (LSE: TW), one of Britain’s largest housebuilding companies. The firm has closed all sales offices and construction sites and is now implementing measures to preserve cash. Dividends have been scrapped and earnings are forecast to drop substantially.
I think it’s relatively easy to see that the coronavirus pandemic will paralyse the UK housing market. It could also mean a long-drawn-out process of recovery with no quick bounce-back.
For this reason, I’m inclined to stay away from Taylor Wimpey for the time being. The same goes for other UK housebuilders listed in the index. There are many bargains to be had elsewhere, with more favourable prospects of recovery and growth, I feel.
Once uncertainty begins to clear and business returns to normal, I think we should expect a surge in housebuilding and buying. I just don’t think it will happen any time soon.
Nobody’s watching films
With many countries around the world in lockdown, leisure and entertainment activities have ceased. While online streaming providers look set to profit from this, cinemas can expect to take a big hit.
One such company is Cineworld (LSE: CINE), the second largest cinema chain globally. The firm’s outlook was bleak even before the outbreak of the virus. Admissions were down 10.8% in its latest period and revenue shrank by 6.2%. Net debt stood at an eye-watering $3.5bn.
The company itself recognises the danger it faces. In the full-year results, directors reported “the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue”. In other words, the company faces going bust within months if lockdown measures remain in place.
I’m not ruling out the possibility of Cineworld staging a comeback, but I think there are better companies out there to invest in during times of economic uncertainty.
It goes without saying that companies with healthy balance sheets, free cash flows and low debt levels are the ones to focus on right now. Cineworld doesn’t match this description, so I’m staying away.