Recent developments in the race to develop a Covid-19 vaccine are undeniably great news for the global economy as well as the health and safety of people around the world.
Investors too are excited about the prospects of nearer term vaccinations, but they must also be wary that many of the darlings of the downturn will begin to appear grossly overvalued as the need for their goods and services fades.
On Nov. 9, Pfizer (PFE) and BioNTech SE (BNTX) released interim results which showed the vaccine to be over 90% effective. Pfizer’s stock by 7.69% the day after the announcement, while BioNTech gained 13.91%.
One week after Pfizer’s announcement, Moderna (MRNA) released results showing it's candidate is 94.5% effective. This drove markets higher and Moderna stock soared 9.58%. Dr. Anthony Fauci said the results are "truly striking" and referred to them as the "light at the end of the tunnel."
The rapid-fire announcements of possible successes points to a potential best-case scenario in terms of economic recovery. In order for the economy to fully recover, people need to be able to travel and gather freely, without worrying about getting sick. Because of this, it is important for there to be multiple approved vaccines to maximize the speed that the vaccines can be produced and distributed.
What it Means for Tech Stocks:
Since the Spring crash, tech stocks soared higher and higher, while much of the rest of the market lagged behind or even continued falling. The Nasdaq is tech-heavy and contains a lot of companies whose business models saw increased demand during Covid. Over the last six months, the Nasdaq handily outperformed the more diverse S&P 500, rising 29.19% while the S&P added 22.78%. This wasn’t the case on either of the Mondays following vaccine result announcements as the Nasdaq lagged behind the S&P considerably both of those days.
Despite both Monday performances, investors shouldn't expect the Nasdaq to underperform on a day-to-day basis quite yet. During the week after Pfizer's update, the Nasdaq still outperformed the S&P 3.14% to 2.72%. This is pretty consistent with the performance over the past six-months even with the Nasdaq's slow start to the week. This was because, despite the vaccine news, it is still many months before it will be widely administered, which is when the real recovery can start.
Despite the likelihood that a consistent, long-term trend of covid-stocks underperforming the market could still be a little while out, short-term traders will want to watch out for some of these so-called "stay-at-home stocks" because anytime there is positive news about a vaccine, they will underperform compared to the stocks that will benefit from a vaccine and return to normal. This also presents a potential play on the other side of the swing, where, after some weakness after a vaccine announcement, these stocks recover on a negative headline about rising coronavirus cases.
Additionally, longer-term investors may want to monitor the ratio between the S&P and the Nasdaq. The S&P/Nasdaq ratio for the past six months was 0.78 but it rose to 0.87 for the past for the last five days. A ratio below 1 shows the Nasdaq outperforming, while a ratio above 1 shows the S&P outperforming. The fact that it rose on the vaccine news shows the S&P 500 strengthened, but since it remained below 1, tech stocks are still leading the way.
Some Stocks to Keep a Close Eye On:
Zoom (ZM): Zoom may very well have been the original Covid stock even before the lockdowns began. The stock soared as businesses, schools, and friends flocked to the service once travel and gatherings became unattractive. Despite its dominance, the nation-wide Zoom dependency will slowly fade as the vaccination rate rises. Zoom has posted a massive gain this year, but it now has a valuation that demands high growth. The stock fell with both vaccine announcements as investors positioned themselves for a world where demand for Zoom is slowing.
Peloton (PTON): Peloton is another stock that many investors flocked to as work-from-home became workout-from-home as lockdowns kicked in and gyms closed. The stock has fallen considerably over the past month, but is still up sharply this year. Like Zoom, a well-vaccinated population probably means slower growth, which starts to make PTON look overvalued. Peleton does also sell subscriptions so the company won't stop growing just because cycle-sales slow, but if people can return to gyms, they may be less interested in home workout equipment.
Chewy (CHWY): Chewy’s rise to dominance during the coronavirus helped to keep pets around the country healthy and happy as their owners transitioned to a life at home. Chewy has used this time to expand their brand into the world of medication delivery for pets, with plans to expand further to deliver medications to veterinarians as well. While Chewy will certainly receive fewer orders as pet owners feel safe venturing out again, they will likely hang on to a large number of pandemic customers. How much of those Covid gains they can hang on to is the question investors should be asking themselves. The stock dropped dramatically following Pfizer’s announcement, but rebounded above pre-announcement levels following the announcement of an expansion into pet care. This implies that, for now, investors are satisfied with Chewy and see it as something that can grow into its high valuation.
