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Margaret Moran
Margaret Moran
Articles (385) 

Virus Stocks: The Danger of Buying on Short-Term Tailwinds

Why long-term investors should steer clear of these trends

On Monday, Pfizer Inc. (NYSE:PFE) and BioNTech SE (NASDAQ:BNTX) announced results from the Phase 3 trial for their Covid-19 vaccine candidate, which concluded that their vaccine is 90% effective in preventing Covid-19 in those without a history of prior infection.

This groundbreaking news has many seeing the proverbial light at the end of the tunnel. We are now closer than ever to having an effective vaccine approved for Covid-19, and while this may not have immediate effects, in the long term it will contribute greatly to the world's recovery from the pandemic.

Following the news, the moves in the stock market were mostly as expected; Pfizer is up more than 9% for the day and BioNTech jumped more than 14%, while the so-called "virus stocks" – i.e., the stocks that some investors piled into to "take advantage" of tailwinds provided by the virus – have dropped. Zoom Video Communications (NASDAQ:ZM), for example, has tanked 14% following its 525% year-to-date run.

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Even giants like Amazon.com (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) are not immune, having lost 3% and 6%, respectively, as investors anticipate that the advantages they gained from the lockdown environment will begin to dwindle.

Stocks that benefitted from the pandemic

There were three primary types of stocks that saw tailwinds due to the pandemic and the resulting changes throughout daily life and the economy: communications and entertainment stocks (such as Zoom and Netflix), pharmaceuticals (particularly the companies that were working on developing Covid-19 vaccines) and essentials (those producing and selling daily necessities such as food, toiletries, etc.).

Communications and entertainment stocks benefitted from the sharp shift from working and socializing in public to working and socializing online. Netflix saw a huge jump in subscribers as more people relied on its streaming services to pass the time, while Zoom and other work-from-home providers saw employers and schools alike sign up for their services. This trend may partially stick around for work-from-home stocks, though not entirely, while entertainment stocks will likely lose some of their subscriber gains – not all, though, as many will have become attached to the entertainment services that saw them through the pandemic.

Companies in the pharmaceutical and biotech industries have seen mixed results, as those attempting to develop a Covid-19 vaccine or treatment and those launching initial public offerings showed gains at the beginning of the year. Since then, vaccine trials being placed on hold or progressing slowly have often caused stock prices to fall again. Now, later on in the pandemic, even Gilead Sciences (GILD), the maker of the broad-spectrum antiviral drug Remdesivir that has been approved in approximately 50 countries for emergency use against Covid-19, has seen it share price drop 12% year to date as investors realized that the pandemic was not all about profits for the company like they were hoping – Gilead has already donated at least 1.5 million doses of the drug.

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Companies that provide daily life essentials, such as grocery stores like Walmart (NYSE:WMT) and Target (NYSE:TGT), have also seen their profits grow slightly during the pandemic due to increased demand as customers stocked up on goods ahead of when they would need them, though this was partially mitigated by lower margins and expenses related to keeping employees and customers safe. Out of all the virus stocks, the boost to these is likely to be the least long-lasting, as share price growth was more due to the realization of the importance of the goods they provide rather than the increases in their sales.

Short term or long term?

Even if some virus stocks will likely keep part of their increases in business, many of their share prices were bid up to beyond what their growth rates are worth, which is what made many of them vulnerable to tanking as soon as some good news regarding the fight against the pandemic came out.

Of course, that's not to say that virus stocks have been a bad investment in all cases. Zoom is still up 300% from the bottom of the market downturn in March through today, so short-term investors who took a position betting on the virus tailwind can still claim significant profits.

However, the key word here is short term. Those who invest in stocks based on short-term tailwinds should not expect their share prices to continue climbing in the long term. While Zoom likely would have seen its share price appreciate in the long term without the pandemic, the short-term tailwinds resulted in a price-earnings ratio of 529.79, which is difficult to justify even for the most bullish investors.

The lesson here is to not fall into the trap of making long-term investment decisions based on short-term conditions - and don't be surprised if an investment loses some or all of its gains when the short-term conditions lose their effect.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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