A stock chief at $7.4 trillion BlackRock shared with us his coronavirus-investing playbook: How to stay safe, what he's avoiding, and some surprising contrarian bets
- Tony DeSpirito of BlackRock told Business Insider about the blend of safety and risk he's targeting after an unprecedented bout of volatility and economic uncertainty.
- With the economy possibly frozen in place for months, and amid the threat that similar measures will be imposed again, he's looking for companies that can outlast their peers.
- DeSpirito is the chief of BlackRock's fundamental active equity business and the manager of a $35 billion fund.
- Visit Business Insider's homepage for more stories.
In an unprecedented crisis, Tony DeSpirito of BlackRock is working on a roadmap.
In an exclusive interview, he told Business Insider how he's thinking about the meltdown spurred on by the coronavirus pandemic.
The core of DeSpirito's approach is finding companies that are highly profitable, which means they steadily earn more than their cost of capital. After the February and March sell-off, he's applying that focus to companies that have abruptly become undervalued.
"Stocks that have done the worst, which are the value stocks, will do the best," he said. "The only times when we've been at spreads this wide (between the most expensive and least expensive stocks) ... over the last hundred years that are similar are the Global Financial Crisis and the Great Depression."
Also at a historic level is the yield gap between dividend-paying stocks and Treasury bonds, which hasn't been this wide in 65 years.
"I think you're going to see demand for dividend-paying stocks grow" as investors continue to seek yields, he said.
One group of stocks fitting that description is the Vanguard Dividend Appreciation Index Fund ETF.
That hunt for value comes with the realization that a company's financial strength is more important than ever, and that shocks to the system can be even more severe than he'd expected.
"In the short run we're spending a lot of time stress testing balance sheets," he said. "We're now doing a case where we say 'What if the capital markets are closed?' All you have is your cash and your revolver, and your sales go to essentially zero. How long can you last?"
Because the expansion ended so abruptly, DeSpirito explains that he's applying that focus on quality to the cyclical stocks that will benefit the most as the US economy gets up off the mat and starts growing again in the next cycle.
"We want high-quality businesses that grow over time," he said of his approach. "Finding the quality cyclicals that have good balance sheets over the next three years is going to prove tremendously valuable."
Those elements are telling him to steer clear of companies with too much leverage, and DeSpirito says companies are going to make different choices now that they know a pandemic could bring the global economy to a halt.
"Coming out of this, I think corporate America is going to rethink what's an inappropriate level of debt, and so that means probably means less M&A," he said. "It may mean less buybacks."
However he said the few companies that do have a ton of cash on their balance sheets will have a rare opportunity to snap up their competitors at low prices.
DeSpirito also identified two areas he sees as safe, steady investments and two areas where the balance of risks and rewards has become much more appealing than it was. The first of those stable areas is tech, which he said is "the new staple."
"Everyone has to build out their home office, and to the extent you didn't have a good home office, you now need one, and so you're spending on equipment there" he said. "Companies spend more on security because all the people working from home. They spend more on the networking telecommunications side."
Interested investors could implement those ideas through funds like the SPDR S&P Technology Hardware ETF, First Trust Nasdaq Cybersecurity ETF, and iShares North American Tech-Multimedia Networking ETF.
Meanwhile he said drugmakers aren't suffering from a big drop in demand the way more consumer-focused businesses are, and their stocks are holding up relatively well because of it. One way to invest in that sector is the Invesco Dynamic Pharmaceuticals ETF.
For investors comfortable with more risk, DeSpirito said bank stocks look appealing in spite of record-low interest rates.
"Dodd-Frank was built for the environment we're going through. So I think you're going to see banks come on the other side of this relatively unscathed," he said. "The financial system is in so much better shape today."
There are also risks worth taking in energy stocks provided they meet his other criteria. The key, he said, is to find the companies that can endure oil prices of $20 a barrel or less for a time.
"Within oil there's a range of quality," he said. "I would say a high-quality company has diverse supply of oil plus low cost of production. And then you want to look at the quality of the balance sheet."
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