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Covd-19 stocks and the
current valuation vs. the broader market
November 2020
Introduction
The Covid-19 pandemic has not affected every company to the same degree. In fact, a handful of companies emerged victorious from the stay-at-home economy that gained traction due to preventive measures introduced by countries around the world. The below chart illustrates some of the best-performing stocks this year and the capital appreciation associated with these stocks to date.
Source: Refinitiv
Even though more than 200 vaccine candidates are being developed to fight the pandemic, Moderna stands out as a unique company whose fortunes are closely tied to the success of its Covid-19 vaccine as the company currently does not have any other marketable drugs or vaccines. For this reason, Moderna can be easily classified as a stock that has received a massive boost from the Covid-19 pandemic.
Moderna and a few other biotech names have had a nice run this year, but the majority of companies that have benefited from the pandemic represent the tech sector. In the following segments, the prospects for the Covid-19 winners will be discussed to gauge a measure of expected returns in the coming months.
The outlook might change dramatically
On Nov. 9, Pfizer Inc. (PFE) reported a 90% efficacy in its Covid-19 vaccine candidate BNT162b2, and this positive news sent markets soaring to new highs. A careful analysis of sector performance following this breakthrough reveals that investors have dumped e-commerce names and other companies that benefited from the work-from-home saga in favor of physical retail names that are expected to report stellar growth once normalcy prevails. Below is a snapshot of market performance on Nov.9.
Source: Refinitiv
The message is loud and clear. Companies that facilitated the stay-at-home economy in the last 8 months or so will come under massive pressure in the coming months as pharmaceutical companies move forward in their efforts to curb the spread of the virus. On the other hand, beaten-down sectors such as energy and retail are likely to make a strong comeback.
Valuation multiples tell a different story
Although warning signs are flashing red for high flying tech stocks, most of these stocks are still trading at sky-high valuation multiples. The rich valuation levels have only expanded in the last few months as investors continued to reward growth stocks over value stocks. The below table provides some insights into how overvalued some stocks are but investors still seem to be oblivious to this fact.
A quick look at the Shiller P/E tells the same story as well.
Source: GuruFocus
The hot sectors in the market are trading at inflated price levels, and investors would be better off by diversifying into less overvalued sectors in the hopes that a major recovery will take shape once business conditions improve for these unloved sectors.
Takeaway
A few companies and business sectors emerged victorious as the global spread of Covid-19 forced one-third of the global population to remain indoors in the last few months. The market performance in the next few months could turn out to be the complete opposite of what we saw so far this year as investors are likely to get behind currently unpopular sectors such as energy and retail. In other words, the fear of the pandemic drove the market performance so far this year, but the “back to normal” theme is likely to dominate the market performance in the coming months.
Companies such as Amazon and Netflix, however, will most likely head higher as these companies have been enjoying favorable macroeconomic conditions even before the pandemic hit the world. The real threat would be for companies that gained overnight investor attention such as Zoom Video Communications and Peloton.
About the author(s)
Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital. For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.
Source: Refinitiv