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COVID Stocks versus Reopening Basket

Posted November 13, 2020 by Denis Smirnov

Please don’t try this at home! Before I proceed, I can’t stress enough that nothing in this post should be interpreted as an invitation to open a Robinhood account and daytrade the stocks below. Now on to the interesting stuff:

This Monday, November 9th we witnessed a remarkable day in the markets. Pfizer announced that its COVID vaccine was over 90% effective in preventing the infection, which led to a massive rally. More interesting than the overall move was the bifurcation among the groups of stocks most impacted by the virus. To illustrate what I mean and analyze impact of major COVID developments, I created two baskets of stocks. Each is a simple equally-weighted 20-stock basket  with 5% allocation to every company. I chose the stocks subjectively and tried to represent various “angles” of the COVID trade without having too many airlines, online retailers or medical plays.

Exhibit 1 shows the “COVID Basket” that consists of 20 stocks whose businesses benefited from stay-at-home nature of 2020. Here we have stocks like Zoom and Peloton, but also a number of online shopping beneficiaries, streaming plays, cloud tech companies and even an RV retailer. As you can see in the last column, these stocks have had a great year through Sunday, November 8th rising anywhere from 32% to 635% with an average increase of 179%. Then on Monday, they had a reckoning with a world not dominated by COVID. They dropped 14% on average with several declining over 20%.

Exhibit 1 – “COVID Basket”

The flip side is the “Reopening Basket” (Exhibit 2). These are stocks hit very hard by the stay-at-home world. They include movie theaters, airlines, cruise operators, owners of office real estate , resorts/casinos, department stores and a variety of other travel/entertainment plays. Going into Monday they were cut in half on average with some down 70%+. Monday, however, was a very good day for most of those companies as they gained 25% on average and some much more.*

Exhibit 2 – “Reopening Basket”

I then loaded these two baskets into our portfolio analytics tool to track their longer-term performance. Exhibit 3 shows the 2020 YTD returns (through Nov 11) for the two baskets as well as the S&P 500. COVID Basket is up 175% YTD and has been as high as +210%. Recovery Basket is currently down 40% YTD, so it’s underperforming by a whopping 215%! S&P 500 is sandwiched in between the two.

Exhibit 3 – YTD Return of COVID Basket, Reopening Basket and S&P 500

Looking at daily returns, Exhibit 4 shows best and worst “reopen days” of the year. For example, on Monday, Nov 9 (Pfizer day) Reopening Basket was up 23.6% while COVID Basket was down 13.8%, so Reopen outperformed by 37.4%. Second best day was on March 24, the day after the market bottomed. In retrospect, that sharp selloff appears overdone and there was a powerful relief rally. Other good days were in late May/early June when it looked like we had the virus under control (we didn’t). Not surprisingly, the worst reopen days were concentrated in the dark days of the Spring with virus raging out of control.  September 21 was an outlier as the first market day after Justice Ruth Bader Ginsburg has died leading to a massive political fight (and the U.S. crossed 200,000 COVID deaths). November 11 was a correction for the possibly overdone upside move on November 9th.

Exhibit 4 – Best and Worst Days for the Reopening Trade

Getting even more creative, Exhibit 5 compares the relative performance of the baskets with waves of U.S. COVID cases. If the blue line is rising, it means COVID stocks are doing better than the reopening stocks and vice versa. It’s not an exact match, but there certainly appears to be some correlation between COVID waves and peaks in the COVID stock outperformance. The cases are still rising rapidly while the performance line peaked (so far) on October 20th. It might indicate that the relationship is “decoupling” now that the vaccine results are giving first real hope of ending the pandemic. Of course, it’s too early to tell for sure.

Exhibit 5 – COVID Trade Versus New COVID Cases

Again, this is not meant as actionable advice, but rather an examination of how the market picks winners/losers and prices in new information. It would appear that prior to Monday, the market didn’t quite believe that an effective vaccine would arrive soon. There are 5-6 solid candidates nearing final approval, but we still had a big pop on concrete news. In this case, the maxim of “buy the rumor, sell the news” didn’t play out. Of course, the real news will be effective  vaccines actually being administered to a majority of the population. I’ll keep an eye on these baskets and will post updates as our COVID fight progresses.

 

*Note: As an aside, Exhibit 2 actually has a great illustration of the counterintuitive nature of percentage returns. For example, AMC was down 65% YTD but then jumped an amazing 51% on Monday. So what is the resulting year-to-date return AFTER the big jump? Still -48%! And it would take another 91% increase just to get back to even.

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