By Grant Wasylik, analyst, Palm Beach Daily
A “zombie” company is one that needs a bailout… or only has enough funds to service the interest on its loans, but not the debt itself.
COVID-19 has created a new type of zombie…
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Now, we’re talking entire industries instead of individual companies.
Airlines, department stores, hotels, resorts and casinos, and restaurants could be mortally wounded by the coronavirus pandemic. Many need massive bailouts or will go bankrupt and cost their investors millions of dollars in losses.
J.Crew… J.C. Penney… Modell’s Sporting Goods… Neiman Marcus… Pier 1… They’re just a few of many retailers to recently file for bankruptcy.
Then there’s hotel occupancy rates. They’ve gone down as much as 70% during the outbreak.
And then there’s airline traffic. From April to May 2019, the TSA averaged 2.4 million airport screenings per day. Over the same span this year, the average is down to 178,000 – a stunning 93% drop.
Here’s why I’m telling you this…
Since its March 23 bottom… the market has rallied more than 30%. But even with the bounce back, certain industries are still down 40–70% this year.
They might be the “walking dead” for some time.
So in today’s essay, I’ll tell you where these industries are lurking… and more importantly, how to avoid them.
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It’s not 5G, artificial intelligence, or the internet of things.
The answer will surprise you. And, for those who take early action, it could lead to an eventual $1.6 million payout.
All 50 states are reopening. But the floodgates aren’t yet.
Many sectors have heavy restrictions in place and are operating at 25% or 50% capacity. And even when states fully reopen, social distancing protocols will likely still be in place.
Sure, things will bounce back. But how long will it take?
People can’t rush back out in droves, nor do many want to. There’s still a higher risk for elderly folks – and those with preexisting health conditions – to catch COVID-19.
Even if you’re younger and healthy, when will you be ready to attend a ball game, go to the movies, or book a flight?
The fact is, no one knows. In fact, several recent earnings calls paint a picture of years, not months, to reach regularity…
- We do not expect things to return to where they were at any time soon. – Denny’s CEO, John Miller
- Traffic levels will not be back to 100%. I believe it’s three full years before we return to the traffic levels that we had just in 2019, and then probably another two before we begin to return to the growth rates that we used to have. – Boeing CEO, Dave Calhoun
- 2020 is a wasted year. 2021 will be a transition year. Then you can start the rebuilding in earnest in 2022 forward. – Norwegian Cruise Line CEO, Frank Del Rio
Now, even if you don’t own airline, cruise line, or restaurant stocks… you should pay close attention to what I have to say.
You see, many zombie industries are tucked away in exchange-traded funds (ETFs).
Recognized for their flexibility, ETFs have been highly popular with investors. They have outpaced mutual funds inflows nine of the last 10 years.
ETFs even have a higher adoption rate than social media, e-commerce sales, and industrial robots over the last decade.
If you have a brokerage account, you likely have exposure to ETFs. And many of them are loaded up on these industries.
So I decided to do some zombie-hunting in ETF land. I reached out to a colleague who’s one of the world’s top ETF experts…
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Meet the Real ETF Zombies
Mike Venuto is the CIO of Toroso Investments. His firm manages a handful of active ETFs and has over $2 billion in assets under management and advisement.
Mike’s been named a “Top 10 ETF All Star.” And he’s the brains behind an innovative “ETF Think Tank.”
He and his team crunch a lot of ETF data.
They singled out 25 zombie industries, including airports, gambling, luxury goods, office real estate investment trusts (REITs), and travel services.
In terms of large-, mid-, and small-cap ETFs, zombie exposures are 5%, 15%, and 13%, respectively.
So if you own a large-cap ETF, like the SPDR S&P 500 ETF Trust (SPY), your zombie exposure is likely about 5%.
And if you own a mid- or small-cap ETF, like the Vanguard Mid-Cap ETF (VO) or iShares Russell 2000 ETF (IWM), your zombie exposure is probably between 10% and 15%.
That’s a good rule of thumb to start with.
But Mike’s team took it a step further by looking at all 1,375 equity ETFs and whittling the list down to 10 with some of the highest zombie exposure…
|iShares Mortgage Real Estate Capped ETF (REM)||97.7|
|U.S. Global Jets ETF (JETS)||87.3|
|SPDR Dow Jones International Real Estate ETF (RWX)||75.9|
|Vanguard Real Estate ETF (VNQ)||61.7|
|Invesco Dynamic Leisure and Entertainment ETF (PEJ)||59.2|
|Global X SuperDividend ETF (SDIV)||31.3|
|Invesco KBW High Dividend Yield Financial ETF (KBWD)||30.6|
|VanEck Vectors Vietnam ETF (VNM)||30.3|
|Consumer Discretionary Select Sector SPDR Fund (XLY)||30.2|
|SPDR S&P Retail ETF (XRT)||28.4|
These 10 ETFs have an average zombie exposure of 53.3%, hurting their year-to-date performance. They’re down an average of 31%.
Pay close attention to ETFs with “real estate” or “REIT,” “consumer,” “retail,” “mid” or “small,” or “value” in their names. They’re loaded with zombies. So you may want to avoid them for now.
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If you want to avoid losing money, then stay away from zombie industries like airlines, restaurants, and retailers for now. They’re the walking dead.
Instead, the big money will flow into tech stocks in the post-COVID-19 age. In fact, Teeka Tiwari has identified one cutting-edge tech that’s helping in the fight against the pandemic. He calls it his No. 1 investment of the decade.