Pivot, Hold, or Walk Away?

It started with alcohol, clothing, and cars. Fashion outlets closed, restaurants shuttered, and auto factories halted production. Then the PPE trade war began for front line workers. Stakeholders began competing fiercely against each other for PPE supplies globally. The demand led car manufacturers to retool and produce ventilators, clothing suppliers to produce masks, and alcohol producers to make hand sanitizer. Certain E-commerce and grocery delivery services boomed. So has online education and remote working technology.

The crisis has highlighted severe gaps in the US supply chain for industries like food and paper production, as products sold out in stores while desolate farmers plowed valuable crops - destined for restaurants and schools - back into the ground. The pain and outcry from the waste are forcing rapid change in supply chain logistics and technology. This evolution will greatly enhance the sector’s efficiency and flexibility, and in the long run, it will add significant value to the entire economy.

The current American industrial transition is reminiscent of how factories were converted to produce military items in World War 2. This time, however, there is a longer-term issue coming into play. As our nation fights to overcome the Coronavirus crisis, our supply chain - and our reliance on China - has become a focal concern for national security and defense. How vulnerable are Americans in the wake of war, disaster, or a pandemic? 

Before this pandemic began, President Trump was already pushing an America-first agenda to lift our dependency on China and shift the nation’s balance of trade. The costs and risks of decoupling from China, combined with rising cash flow challenges, make it nearly impossible for companies to rebuild operations in the US in the short term. Progress is being made thanks to government policy and current market factors, but success in decoupling will come very slowly and vary significantly from company to company. We also have to face the reality that many American factories, especially in the Midwest, shuttered permanently last recession. For manufacturers that were already facing job losses pre-Coronavirus, there may be no coming back.

In reality, the United States is facing severe economic declines that may last years before a full recovery comes into view. But there is a silver lining. America is proving its resiliency and its ability to evolve to meet new market demand.

Once the debt crisis fully manifests, the United States may face significant losses across a wide swath of industries, with rising vacancies and businesses closed for good. Thankfully, new opportunities are already rising on a daily basis in fintech, biotech, medtech, foodtech, and alternative investments to fill gaps, and a culture of innovation is giving way to a complete overhaul of American business. Hedge funds, which normally thrive on volatility, are also experiencing a resurgence.

Know When to Pivot, Hold, or Walk Away

First comes the fall. For investors, CEOs, and stakeholders whose companies are most vulnerable, the big question they will have to face is when and under what circumstances to hold, walk away, or successfully pivot. This is not a simple black-and-white assessment. Can the company or asset recover? If so, when and at what cost? Should available capital be redeployed into new opportunities, or used to save existing operations?

Right now every CEO and sophisticated investor - including family offices - should be using a risk-based approach to comb through past financial statements, future projections, and company releases to revalue every asset and revenue stream in preparation for potential economic decline.

Revaluation enables companies and portfolios to determine available cash flow for new investment. It also highlights what should go on the chopping block and helps major investors decide which companies will receive extra time, resources, advice, business development, and network support. Active investors are especially valuable in times like these, and there may be value in some passive investors stepping up into more active supporting roles.

There are other questions that need to be asked as part of this process. Does the CEO have the courage to make swift and painful decisions, for the sake of the company's future? Is he/she realistic and pragmatic with company forecasts? Is management proactive or reactive to current market conditions? What is their debt load and risk of default, and who benefits from any credit action? How much capital and other resources would it take to help them survive or pivot, how long might recovery take, and what is the ROI for this type of resource deployment?

How to Revalue Companies and Assets

There are many fluctuating factors that make it impossible to assign a single concrete value to every revenue stream and asset you hold. How far into the future should your projections go? How extreme should your best and worst cases be? There could be an overwhelming number of factors in a revaluation, with limitless combinations of outcomes. How do you cut out the noise to zero in on the ones that will have the greatest influence in operations and profitable outcomes?

Stay tuned for my next article, which will explore key factors and strategies in a successful revaluation. I will share my own experience and give you some real-life examples of revaluation at work. From there, you can begin to make decisions about where, when, and how to strategically deploy resources and position your portfolio for strong future gains.

Keep learning and growing.

- Kamil Homsi

* This is part three of a series about debt, the economy, and investing in our current world. Stay tuned to learn more about risks, opportunities, and advice for navigating recessions, stagflation, and market volatility. Read part one ("Important Lessons We Can Learn"). Read part two ("Beware of FOMO").