The coronavirus outbreak has had a serious impact in terms of both the human toll on the health of thousands of people worldwide and the economic effects of quarantines and business closures. That impact has also been felt on global stock markets as major equity indexes have fallen by more than 10 per cent.
However, there are a small number of companies whose businesses stand to benefit from the outbreak. In many cases, the stock prices of these companies have jumped as investors speculate on just how big the benefits could be. But some companies may be able to realize sustainable boosts to their businesses and more long-running gains to their stock prices.
“A market-timing investor might figure that companies making hand-sanitizing wipes, video-conferencing software or home-exercise equipment might benefit from a public health emergency like a pandemic,” says Lisa Kramer, professor of finance at the University of Toronto who specializes on the psychology behind financial decision-making.
Ms. Kramer says that when many investors buy these stocks, prices can rise in a way that seems at odds with the true present value of the companies’ future expected cash flows.
One of the stocks that hit Ms. Kramer’s radar is San Jose, Calif.-based Zoom Video Communications Inc. (ZM-Q), which offers communications software that combines video conferencing, online meetings, chat and mobile collaboration. As businesses have cancelled international travel due to the spread of the coronavirus and cut down on face-to-face meetings, Zoom’s stock has soared, rising some 40 per cent over the past three months.
“A lot of the rally has been driven by retail investors, and I worry expectations have become overheated,” says Zane Chrane, analyst with Sanford C. Bernstein & Co. LLC in New York. Despite the run-up, Mr. Chrane feels the stock is worth buying. “I still think its an undervalued company.”
He points to the jump in new customers signing up for Zoom’s products since the coronavirus outbreak began. He notes that while not all of those customers will lead to substantial sustained revenue, Zoom will also benefit as the coronavirus crisis pushes large companies to increase the use of videoconferencing to help staff work remotely and in contingency planning.
It’s not just smaller tech companies that have been gaining from coronavirus worries. Some blue chips in traditional industries are also positioned to benefit. 3M Co. (MMM-N) is a diversified company with a wide range of products and the largest U.S. supplier of N95 respirator masks used by medical workers to protect against infection from patients who may have the virus. As well, even though health officials have asked the general public not to purchase the masks as they won’t help prevent individuals from catching the virus, the masks are out of stock at most retailers and there have been reports of price gouging through online distributors.
3M’s stock was given a boost when Scott Davis, lead research analyst at Melius Research LLC in New York, raised his rating on the company’s shares to “outperform.” Mr. Davis’s research report points to estimates that the U.S. will need 10 times the number of masks it already has stockpiled (300 million versus 30 million currently on hand.) He also notes 3M’s stock was a meaningful outperformer during the SARS panic in 2003.
“The simple reality is that 3M is one of only a handful of S&P 500 names that sells a necessary product in virus containment,” he said in the report. “This is being ignored by the market.”
Another stock that has benefited from the coronavirus outbreak is U.S. biotech company Gilead Sciences Inc. (GILD-Q). Gilead plans to start two late-stage studies for remdesivir, an experimental treatment for the coronavirus. Investors bid up Gilead shares by more than 20 per cent in hopes that the company may have a vaccine in the works for the Covid-19 virus. Analysts recognize the lucrative potential such a cure may have.
“Of all the companies with massive upside moves on Covid-19 interventions, Gilead is, by far, the most plausible to achieve anything,” said Brian Skorney, senior research analyst at Robert W. Baird & Co. Inc. in New York in a research note. However, on the whole, those who follow the company are not entirely convinced.
Jared Holz, health-care equity strategist at Jefferies Financial Group Inc. in New York, says Gilead shares are “extended” at this time, although he notes that in the current broad market situation, with many stocks under pressure, companies with theoretical benefits from the coronavirus outbreak may have more room to rise. Meanwhile, a research report from Carter Gould, senior analyst at Barclays Capital Inc. in New York, rates Gilead as “underweight,” saying the stock’s surge “seems overdone.”
There are also some smaller biotech companies that have seen their shares surge on potential products to diagnose or treat the coronavirus or prevent its spread. They include Co-Diagnostics Inc. (CODX-Q), Vir Biotechnology Inc. (VIR-Q) and Novavax Inc. (NVAX-Q). However, most market observers consider these purely speculative at this point, with a high likelihood of a quick drop once the coronavirus abates.
Some of the market’s largest companies are also being touted for the benefits they may receive from the coronavirus crisis. Worries over the outbreak may lead to people to stay at home as much as they can rather than go to the mall, gym or movie theatre. This phenomenon could boost companies like Amazon.com Inc. (AMZN-Q), Peloton Interactive Inc. (PTON-Q) and Netflix Inc. (NFLX-Q).
However, the outbreak would have to become much more severe in North America for these companies to receive enough benefits to affect their bottom lines significantly. Furthermore, Ms. Kramer preaches caution for investors looking to play the coronavirus effect.
“At a time like this, some stocks are prone to rise meteorically due to sentiment-driven buying,” she says. “Some traders are getting so carried away by their instincts that they’re making some basic mistakes.”