As the world hunkers down and hides from the coronavirus, no doubt your portfolio has taken a hit recently. Economic growth in China was already anemic, and now with entire cities closed and travel stopped, and movie theatres and other business shuttered, it will be next-to-impossible for China to show much growth in the near term. This, of course, could hurt North American growth, too.
So, what to do? Well, we would first suggest not panicking. Like every crisis, this one will pass. The media and the public will lather themselves up in a frenzy, but business — eventually — will carry on. One of the benefits of age is experience — this is nothing we haven’t seen in markets before. It might have a different name, but the result is the same: Strategic selling, worried selling, panic selling, consolidation, recovery, profits.
But instead of joining the crowd, why not just use this time to look at your portfolio holdings? Are your companies, in fact, good ones? If not, then you shouldn’t own them, regardless of any virus that might be circling the earth at any one time. We have outlined a few characteristics of ‘good’ companies before in this column. Let’s look at a few more:
Fewer shares outstanding
Investment academics have long debated whether share buybacks are good for companies or not. Sure, they may not be great for helping a company
grow, but there is much less debate than whether they are good for share prices. We will leave the debate to the academics, but let’s look at Apple Inc. stock (AAPL on Nasdaq) to underscore a point. In the last decade, the number of shares Apple has outstanding has dropped from 6.4 billion shares to less than 4.4 billion shares. It has bought back two billion shares with its massive cash flow. Yet still, it has US$207 billion in its bank account today. The buybacks increase per-share leverage, and per share earnings have more than doubled in that time (to 2020 estimates).Momentum Factors 
We love momentum stocks. Sure, they work better in a bull market, but in any type of market you can see some stocks move to the upside. We like to look at several factors: Analysts’ target revisions to the upside, accelerating earnings, earnings revisions, new highs on stocks, increasing volume of trade and positive earnings surprises. Amazon (AMZN on Nasdaq) is the best recent example. A week ago, when markets were plunging, Amazon shares rose $138 per share, and the company’s value rose by $80 billion. The stock hit an all-time high, and saw several target price revisions, after blowing away fourth-quarter earnings estimates. In a weak market environment, momentum stocks can still be profitable.
Free Cash Flow vs. Operating Cash Flow 
Many companies report strong operating cash flow, but then have to spend money on plant maintenance, dividends, equipment and so on. More is spent on acquisitions and share buybacks. Some of these expenses, such as acquisitions, are discretionary. But many — such as maintenance — are not. Looking at free cash flow gives you a sense of how much money a company keeps at the end of each year, after all of its expenses. Let’s compare two companies. The aforementioned Apple generated US$73 billion in cash flow last year, and after capital expenditures had US$63 billion in free cash flow (or 86 per cent). Finning (FTT on TSX), a heavy equipment dealer, in the 12 months to Sept. 30, 2019 had US$243 million in operating cash flow, and US$66 million in free cash flow (27 per cent). They are not, of course, directly comparable, being in different industries, but investors love free cash flow nonetheless. In the past year, Finning shares fell 6 per cent; Apple shares rose 86 per cent.
Dividend Increases
When markets are bad, or economic times are tough, we love dividend increases. Canadian National Railway (CNR on TSX) just raised its dividend by seven per cent (it also announced a buyback). Metro (MRU on TSX) raised its dividend by 12.5 per cent MTY Food Group (MTY on TSX) raised by 12 per cent. Dividend increases are like a giant flag waved by a company that says, ‘Hey investors, look at us, for now, at least, business is pretty good!’. A rising dividend and a plunging market can quickly combine to give you a high yield, and stock risk in such cases is much less than a stock with a higher dividend yield that is created solely from a market decline.
Lack of Goodwill
Goodwill is the amount of money a company pays for an asset over and above its book value. If business is good, and the company is profitable, then the goodwill is ‘worth it’ and it can be a valuable asset. Investors talking about goodwill often discuss Coca-Cola (KO on NYSE). It has a lot of goodwill on its books (about US$17 billion goodwill versus its US$250 billion market cap), but investors are not concerned, as its ‘brand’ and of course its secret formula for soft drinks are clearly valuable. Contrast this with, say, Aurora Cannabis (ACB on TSX) which has US$3.2 billion in goodwill against its US$2.7 billion market cap. With the cannabis industry, let’s be generous here and just say, ‘It’s not what it used to be’ many investors are worried about giant write-downs potentially ahead for the company. It’s really no wonder — if one looks at the goodwill risk — why the stock is down more than 74 per cent in the past year.
So, as the coronavirus picks up headlines (the crisis is expected to peak in April or May, according to health experts), don’t panic. Make sure you own ‘good’ stocks with minimal financial risk. These will be the ones that recover the fastest.
Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (