15 May Callaway Golf (ELY)

There are not many nice things you can say about the coronavirus. It has upended our lives to a degree I have not seen in my lifetime (and will hopefully not see again). It has cut a swathe through perfectly healthy economies and dragged down some perfectly good companies with it, along with their share prices.

But the silver lining, for stock market investors at least, is that there are some bargains out there. Stocks that you may have followed for years, may have even owned at different times, but then discarded because of their expensive valuations, have been cut in half. And to me, there’s nothing I like better than a 50% discount.

For me, one of these such stocks is golf equipment manufacturer Callaway. It was a god stock for me after the GFC but by the end of 2018, it had become overpriced with limited upside compared to the risks. By January 2020 the share price was sitting at a healthy $21-$22, but just a couple of months later had lost more than three-quarters of its value before recovering a little to currently sit at around $11.

The story for me here is that coronavirus has changed our way of life as it stands at the moment, but will also have massive implications for how we live going forward. There’s a good chance there will be no international travel for a few years, and if there is it will be limited. People will likely spend more time at home or travelling domestically.

The same goes for how we interact with each other. Large social gatherings held indoors are out. Smaller groups, participating in social distancing, while enjoying the grout outdoors are in. Golf anyone? If your golf game’s anything like mine its the ultimate form of social distancing. I’m generally spending more time in the trees than on the fairway, while my playing partners are strewn all over the place. It’s arguably the safest sport to be playing in these uncertain times.

Now the leisure industry has been hit hard, as you can tell by company share prices in the sector. However, as things slowly open up again golf courses (along with most outdoor activities) will be among the first to get going again – if they ever closed down at all. I know in most of Australia we were at least allowed to play in pairs, except for our unfortunate Victorian brothers and sisters. Clubhouses may not be open but you’ll certainly be able to get out on the course.

China has been a little ahead of the timeline than the rest of us. They experienced the worst of the virus (hopefully) in late 2019 early 2020 and have reopened before anyone else as a consequence. As you can imagine golf is massive business in Asia, and if you own a set of clubs from after the 2000s there probably isn’t a golf club in your bag that wasn’t made in China. They may tell you on the packaging that it was made in the USA, or Japan, or even Australia, but that’s only where it was assembled. All the parts were actually made in China.

There’s also a huge market for golf equipment in the country and if they are any indication on how sales will go in the rest of the world then Callaway won’t have much to worry about. Its golf equipment sales in China got back to 2019 levels by April, with its apparel business only slightly behind. This will be a small blip if you’re looking five years ahead.

Tee times in China and South Korea are booked solid for months in advance, while golf courses in Europe begin to open again, and the US National Golf Foundation advises that 80% of golf courses in the country will be opening soon. It seems golf will be one of the first pastimes to get back on track when the world slowly reopens.

Callaway’s last earnings reports missed estimates for the first time in four quarters, which was to be expected considering the impact to the business due to the pandemic. But we’re not buying the stock for what happened last quarter, we’re buying it for what they will be doing into the new year and beyond, and I suspect the falls in the share price have been overdone considering it will be in one of the first industries back on its feet. You can pick the company up now for a 50% discount at a time when the S&P500 is only down 13%. Buy on the dips and you’ll most likely be happy with your returns over the next few years at least.