Another wild day of virus headlines pushes the S&P 500 back into the correction zone as California declares a state emergency. Members of the BMR crew have been traveling and have yet to see any signs of long-term economic deterioration . . . in which case the selling looks extremely overdone.
Start with the West Coast. Life continues across California as well as Seattle. Airports are still open and stores are being restocked when they run out of merchandise. While some people are choosing to stay home, others are still on the road and in the air. Businesses are still operating almost without interruption. The only material impacts have been to the cruise ship lines and the privately owned senior housing facility that turned into the epicenters of the California and Seattle outbreaks. Those companies aren't major components of their regional economies much less the market as a whole.
If anything, clouds around the Senior Housing Facility in Seattle create strategic opportunities for other SNF REITs. WellTower (WELL: $76) sold several properties to this company a few years ago (at a substantial profit) and may now benefit from what amounts to a competitor's distress. As for the Cruise Lines, we don't invest in those companies . . . or the Airlines, for that matter.
The big question is whether areas of the U.S. in the outbreak zone are feeling the chill. We just don't see it. We're at a conference in New York City right now and we can say the city is as vibrant as ever. Cab drivers and Lyft drivers alike have not seen any deterioration in traffic or fare volume. The subways are still full. While some companies have guided their people to work from home, they're still paying rent. Other offices remain full. People are squirting a lot of hand sanitizer and avoiding close contact, but beyond a lot of nervous talk, that's the extent of the disruption so far. This is a metropolitan region where 11% of all known U.S. coronavirus cases have been identified (despite only having 6% of the overall population) and life goes on.
The flagship Apple Store on Fifth Avenue remains open at all hours. And it remains full of shoppers after midnight. That's a strong point in Apple's (AAPL) favor . . . despite the stock being down 9% in the last two weeks, the retail story is not faltering. People who wanted to buy iPhones and have an opportunity to do so are paying full price. As China comes back online, they'll buy there, too.
(The Shanghai Composite is up YTD, by the way. The country is the global center of the outbreak, with at least 80 million people under protective quarantine, and it's one of the strongest markets on the planet. That's suggestive in itself.)
Who owns the real estate under the flagship Apple Store? A company called Boston Properties (BXP), which is only down 7% in the last two weeks and still doesn't even yield 3% after its decline. Investors just aren't connecting all the dots and chasing their assumptions all the way to their natural conclusions. If Apple is in trouble, why is its landlord so resilient? The answer is that either the logic is faulty or Apple may not be in such sad shape.
Likewise, we see dynamic Commercial and Retail environments throughout New York, which is where Vornado (VNO: $53) rules the roost. That stock is down 22% since reporting 4Q19 earnings in the first phases of the U.S. outbreak. At the time, we attributed the decline to the combination of recent property sales and investment in massive new developments. Construction on those new buildings continues. Vornado has started leasing some of those spaces and will make a lot of money there in 2021 and beyond. This is a great time in the economic cycle to buy a company like Vornado, and note that it is paying a 4.8% dividend. We'll need to see a lot more weakness in New York before we'd abandon it.
And since it's Friday, we have a stealth recommendation for you. We've been watching Virgin Galactic (SPCE: $23) closely in recent weeks. It's a great story, a pure play on the next Space Age. Richard Branson rarely loses money. We think the stock can hit $100 in the next few years once current volatility unwinds and the world gets back to normal. If you have cash and commitment, start building a position here. The full Research Report is coming soon.