It is a surreal time to be an investor. Heck, it's a surreal time to be human as we battle against an invisible enemy.
Investing with so much uncertainty is always hard. However, the companies I'm focusing on today are those which have the capacity to endure and emerge far stronger in years to come.
The capacity to endure
The businesses with the greatest capacity to endure will be those that have:
- The ability to reinvest, remain agile and take advantage of opportunities
- Strong customer loyalty to recover quickly
The ability to reinvest can come from having a strong balance sheet with very low debt. It can also come from operating at high margins, leaving plenty of cash free to be reinvested.
Strong customer loyalty is usually the result of brand recognition or from being an essential product in peoples' lives.
I see three companies in particular as having these qualities:
A2 Milk Company Ltd (ASX: A2M)
a2 Milk has already proven its ability to reinvest. Last week, the company deployed some of its huge cash pile to increase its stake in Synlait Milk Ltd (ASX: SM1). Synlait is a crucial link in a2 Milk's supply chain and the purchase will lift a2 Milk's share in the company from 17.4% to 19.8%. Chinese food manufacturer Bright Dairy Holding Limited owns 39% of Synlait.
Xero Limited (ASX: XRO)
Although growth will likely slow as many small businesses struggle with lock-down conditions, I expect Xero to be well-positioned for an eventual recovery. The company had NZ$111 million of cash at 30 September 2019 and no short term debt. In addition, because Xero operates at high margins, it can preserve more cash by reducing sales and marketing spend in the short term.
CSL Limited (ASX: CSL)
CSL is another great business with a strong capacity to endure. The company will continue to see strong support for its products from all corners of the globe as health is put to the top of people's minds. And despite carrying a lot of debt, high product margins should allow it to continue to invest in research and development to grow its competitive advantage.
Foolish takeaway
We are all being tested for our capacity to endure at the moment. It is hard, but I think having a strong, diversified portfolio to weather the volatility is one way we can try to increase our resilience.
