The market may be rallying today, but don’t be fooled into thinking that the market has found a bottom.
The storm from the COVID-19 pandemic isn’t over. We are still nearer the beginning than the end of the crisis and that means you should expect the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) to swing wildly for a few more weeks, at least!
Just about every company is feeling the impact from the corona-carnage. But there are a few ASX large caps that could provide protection from earnings shock.
These companies represent some of the lowest risk opportunities on our market from the epidemic. Their bottom-lines are tipped to hold up better than most even in the face of a deep global recession.
It isn’t only earnings resilience that makes the InvoCare Limited (ASX: IVC) share price a standout – it’s the fact that it could be in for a profit upgrade.
The funeral services provider released a pleasing 2019 profit result in February before the coronavirus outbreak as death rates in Australia reverted to the mean.
Going by what we are seeing overseas and the probability of the pandemic worsening here, Australia’s death rate is likely to jump even higher.
Shipshape for the pandemic
Another defensive-growth stock to watch is shipbuilder Austal Limited (ASX: ASB). Most of its business comes from building combat vessels for the US Navy.
Defence spending is not correlated with economic activity, and in case anyone forgets, there is an arms race underway to counter the rise of China. This risk to the US and its allies will outlive any pandemic.
What’s more, the US Navy projects are locked with and budgets have been set aside and this provides good earnings visibility for Austal in an increasingly murky environment.
Fuel to burn
Many infrastructure stocks haven’t proven to be defensive enough to withstand the coronavirus quarantine. Toll road operators like Transurban Group (ASX: TOL) and our largest airport operator Sydney Airport Holdings Pty Ltd (ASX: SYD) are feeling the squeeze from falling traffic.
But one stock in the sector that’s much better placed to withstand the sharp drop in economic activity is gas pipeline operator APA Group (ASX: APA).
While slumping oil prices have created havoc for gas producers, this isn’t an issue for APA as it only provides a means of transporting gas and charges a toll for doing so.
It helps that the group signed “take-or-pay” contracts with customers, which means APA gets to paid regardless of whether customers have anything to transport through its network.
The only real risk is the collapse of its customers. Not impossible given where the oil price is trading, but prices will need to stay lower for longer before this becomes more of an issue.
The gas price tends to lag the oil price by about three months. The world should have better control of the virus by then.
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Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia has recommended InvoCare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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