Trading opportunities around COVID-19

We’re more than 60-days into the COVID-19 crisis (and counting), with each day bringing us hope and disappointment by the hour. Hope, that perhaps this time it’s not as bad as we thought. Then, disappointment, that perhaps it might be worse that we feared. And throughout that time, the markets have been gyrating.

Without taking away from the human tragedy that COVID-19 has brought about, are there opportunities that investors might seize upon? 

The Bigger Picture

Before we address prospects of potential opportunities around COVID-19, lets talk briefly about the fickleness of the markets. Throughout history, there have been (and will continue to be) market-moving events that cause wild swings – both to the upside and down. The one that stands out most recently in our minds would be the U.S.-China Trade War.

To appreciate how this played out, lets look at a list of significant events that transpired over a period of 565-days, and a graph of the movement of the S&P 500 index in the intervening period. Suffice to say that, like we are experiencing with COVID-19, there were periods of optimism intermingled with pessimism. 

The markets reacted to every bit of news that came out of both sides to the conflict – but in the bigger scheme of things, reality prevailed. Bottomline: The index traded at 2760 on Day 1 of the conflict. It ended at 3289 on Day 565. Anyone that bailed out on Day 1 would have missed out on nearly 20% of solid gains!

Searching For COVID-19 Opportunities

If you are a firm believer of the golden rule that, given some space to digest short-term setbacks, markets will typically bounce back, then it may be prudent to look for opportunities arising from the current virus crisis. And what better place to look for those hidden gems than in an industry that’ll likely help us beat the dreaded virus – Pharmaceuticals.  

Since news broke of the virus, back in Dec 2019, pharma companies globally have been scrambling to become the first ones to bring forward a cure. And that offers nimble traders (not long-term investors!) a slim window of opportunity.  Traders who which to make the best of this opportunity should look to getting in on the action by making bets on some of those market leaders. Other derivatives to health care should do well including the cannabis industry and products, infrastructure and technology.

Five companies that are showing some promise are listed in the chart above (not necessarily in order of preference). A look at the longer-term price movement charts shows that none of them have really been making waves – until more recently (as evidenced in the short-term price movement charts). We’ll take a close look at three of these trading opportunities:

  1. Gilead Sciences, Inc. (GILD)

WHY? It already has a drug, Remdesivir, a broad-spectrum antiviral agent used in other viral outbreak situations, which promises to be an effective anti-COVID-19 drug. Currently under Phase 3 trials, if GILD does reach the finish line before anyone else, traders will certainly be richly rewarded.

PAYOFF: GILD offers a 3.61% dividend yield, and has a 1-year price target of $73.48 (which is lower than its current price). If they are among the first three to strike gold, that price target is likely to move significantly higher.

  1. Regeneron Pharmaceuticals, Inc. (REGN)

WHY? REGN has an existing collaboration agreement with the US Department of Health and Human Services (HHS), and recently announced an expansion to that arrangement that’ll include COVID-19. The REGN-HHS partnership hopes to leverage the company’s monoclonal antibody technology known as Velocimmune to test the resulting drug’s efficacy against COVID-19. 

PAYOFF: REGN doesn’t pay a dividend, and trades at nearly 2x the PE (at 26.56x) to that of GILD. However, it is a slightly less risky/volatile stock (Beta 0.77 vs. 0.99) than GILD. The most expensive of all the names on our list, analysts have a 1-year target that’s below its current price.

  1. Sanofi (SNY)

WHY? Of the three names discussed here, SNY looks to be the one with a slight head-start over the others. Having already worked on treatments for SARS in the past, SNY has teamed up with the U.S. government’s HHS department to leverage its Recombinant DNA technology to find a vaccine for novel coronavirus. 

PAYOFF: At 3.65%, SNY’s dividend yield is slightly higher than GILDs. However, at a PE of 38.38x, this is not an inexpensive stock. But the silver lining is that analysts have a 1-year price target that’s significantly higher than current prices.

Placing Your Bets

Clearly, as demonstrated earlier on in this post, these names aren’t meant as long-term holds. In the coming weeks (hopefully earlier!), there’ll be greater clarity about which of them is closer to developing a viable solution to combat COVID-19. When that happens, expect one or more of them to spike higher (dramatically!), while the others will likely tank.

These are not “sure things” – given that so many smart people are working on a solution, one of the companies mentioned here will likely strike gold. If you plan on betting on any of them, be nimble, and continuously watch the news. All these names trade on headlines.