Talk of opening the economy sooner due to Remdesivir
Early news on Gilead’s (NASDAQ:GILD) Remdesivir showing very strong results. It’s one anecdotal report, but patients showed marked improvement in fever and lung function rapidly. Almost all leaving the hospital. Only two deaths in this part of the study and perhaps due to Remdesivir being applied too late. This is kicking off a powerful market rally today that could last all next week. Now the idea that once someone becomes seriously ill and goes to the hospital with COVID-19 won’t go on a respirator and die adds a lot of optimism. It means that we can start taking more risks in getting back to work. That’s a very optimistic view, but combine this news with yesterday’s conjecture that possibly 20% of the US population already is immune and that young people tend not to get ill from coronavirus. It then causes the market to discount the disease to the effect that the market is going higher. This is not a value judgment from me, it’s my conjecture of sentiment supported by market action.
Another idea here is that once you have one antiviral, others will come online at a faster cadence than previously thought. There’s news about other treatments, like a convalescent antibody treatment, and also an immunology treatment that shuts down the cytokine “storm.” This is an overreaction to the virus causing organ damage, primarily to the lungs. You probably read about this independently or heard these developments in the news. What I’m trying to do here is to just make a case that the market is now turning from preoccupation with the epidemic and more about what happens after. Already the president who was roundly criticized for broaching the topic last week started the wheels in motion.
Presidential palaver about opening up society and the economy lines up with this development
States are organizing into regions, so far Western States, Eastern States, and the Midwest have organized coordinating groups. The president also is organizing a joint civilian and governmental council to coordinate and plan the reopening. It’s top of mind with probably every citizen right now. As long as the news flow carries that optimism, count on the market floating up higher. In fact, it could be higher than I expected.
This is causing a sell-off in stocks that helped cope with the disease…”pro-pandemic”
Just look at your screen, stocks are up strongly, yet Amazon (AMZN) is down 38 points. I expect it and others in this cohort to fall throughout next week. So who else is hurting? Peloton (PTON), Slack (WORK), Docusign (DOCU), Activision Blizzard (ATVI), Roku Inc. (ROKU), Zoom (ZM), Netflix (NFLX) – many down significantly. This is a partial list, probably any tech or cloud services name that will be in the red will be “pro” pandemic. The advantages of that product or service will not become obsolete once the virus is defeated. My point is, that no one is going to give up playing video games. In fact, I bet that the current level might not be sustained and gameplay will still be elevated from pre-epidemic times. The same with AMZN obviously, or that WORK’s Slack product won’t stop being used. I will chart some of the above names and see where there might be some support levels may come into play.
In other words, don’t buy AMZN today because it’s down almost 40 points. Wait for stocks to come to you. I think all these names are worth being bought. If you just have to buy these on the dip please start very small. Once you really suss out a bottom in the names you could get more aggressive.
What stocks might benefit from the change in outlook for the economy?
Some of you might this is a “no-brainer” and others might see this as a loser move, but I think the price for Gilead right now in the mid-80s is too low. I think GILD will probably break 100, just for the name recognition, and momentum. At 85 GILD is above the 52-week high, but the all-time high for GILD is about 120. If GILD closes above 85 soon then I think momentum traders will jump on this name and ride it all next week. The official study will be published next week or so, so I think they will take it up and sell on the news. I know I said that now is not the time for fast-money trades, but this name is a fast-money trade right now. Please note, I’m a long-term investor in GILD. I like the dividend, and I like that they are aggressively acquiring other biotechs. I’m also an investor in Abbvie (ABBV), and Bristol Myers (BMY), for the same reasons, they are acquiring other pharma and biotech names.
The banks got hit hard this week.
I think the big banks should bounce strongly and sustainably on the virus news optimism. I think investors treated them very harshly this week. If people can get back to work they will be able to pay their mortgages, and businesses can pay their loans. That means that the will likely reduce their loan loss reserves. I said this before, I think JP Morgan (JPM) should get back to old highs, and Citibank(C) and BankAmerica (BAC) might be good for a longer-term trade. Or as an investment. I’m an investor in Wells Fargo (WFC), but I’m considering JPM.
Uber (NYSE:UBER) is up strongly on its write-down announcements. I suspect that they are up because as the economy opens up people will avoid trains and buses to go to work and use Uber as an alternative. Also, i bet states ease off on employee regulations to get people back to work. Uber is now a friend to the states. We are in what’s effectively an economic depression. The best thing they can do to get unskilled people back to work is to let them drive Ubers. Uber could adjust to the new reality quickly, drivers can put up partitions, cover seats, wipe down after each ride as a rule. They could be required to wipe down in front of the new passengers to assure that it’s done.
I know this is probably causing groans right now, but hear me out. Boeing (BA) just announced that they are restarting manufacturing. We are coming very close to the mid-year mark so that they will announce the 737 MAX airworthy restart. Why should anyone care? Airlines are going belly up with the lowest passenger miles flown in decades. Here’s the thing, the 737 MAX uses less fuel, and lower maintenance costs, could make flights without the middle seat, and the cost for more extensive cleaning and disinfection possible, even profitable. There’s still a 5,000 unit backlog. Once non-essential travel becomes OK again, possibly late summer, BA will be revalued higher as the nightmare will finally be over. This is likely not a fast-money trade, but I think it could be a one-month to alpha trade. It also could be an investment, once the loans come through. BA no longer has a dividend so it’s not an investment in my book. That said, I would think that in a year or maybe two BA could reinstate that dividend. If you like being a contrarian, then BA is so hated that perhaps, painstaking accumulation on a regular basis makes sense. Once they reinstate the dividend BA could graduate back into being an investment. The world will go back to normal, and that means that travel will come back.
If Boeing makes sense, what about airlines?
Now that the airlines are lining up for a bailout, it might make sense to try and trade some of them. Of all the airlines, I suspect that Delta (DAL) and Southwest (LUV) have the best books and best operations. LUV could be interesting since it has standardized on the 737 and they have the most MAX planes on order. I don’t have a lot of conviction here, I’m just broaching this as an idea that should be mulled over before you pull the trigger. I need to do more thinking on this. I will report back in my next note.
More “value” names in tech to pick at as speculation trades
What I mean by value is not about cheap stocks per se, but that the value in these names is hidden. Perhaps contrarian is a better way of looking at it. Ad-driven businesses should do better as talk of the world coming back to normal is being considered. That might be short-lived sentiment so this could be an alpha-generating opportunity, or you should take a gradual approach and accumulate the names below:
Facebook (FB) (on further weakness): I think FB could get interesting as we are now throwing privacy out the window. What do I mean? Well, there’s news that Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple (AAPL) are collaborating on an app that helps with contact tracing. That is, if someone comes down with COVID-19, you will be informed merely if your phone is within the range of someone infected. It’s opt-in, but that’s not promoting privacy. Also, people have a renewed appreciation for social network technology, and I think the political will to persecute FB and others has cooled.
Alphabet should be perceived as doing better as ad dollars could come back sooner. In fact, it’s up today.
March 30 I wrote a piece on investment themes pre- and post-virus “cure.”
I really just want you to have this notion in mind again. The thoughts about how as the virus defeat has more visibility, and there’s optimism that we are at the beginning of opening the economy, there could be opportunities in post-virus notions. The list below is not all encompassing. Also, there could be a situation that pessimism creeps in that the economy is not coming back all so soon.
Here was my “post” virus list from the above March 30 article, with a bit more annotation…
There are probably other virtual activities that are affecting by the virus but dating to me seems like it’s the most affected. So they are a separate category, in fact, I think Match.com (NASDAQ:MTCH) has great potential for alpha. Also, it wasn’t part of my thinking but Expedia (EXPE) and Booking.com (BKNG) make sense for a long-term type trade too.
The Meet Group (MEET)
I suspect that fast-food venues will get top priority since it employs a lot of low skilled workers that can get rehired very quickly. I didn’t include McDonald’s (MCD), but it should be on the list.
Shake Shack (SHAK)
Resorts, venues, and destinations
Obviously, right now investing in resorts sounds crazy. However, at some point, these venues will come back in vogue and value as the virus recedes. I might get a quibble about DIS being on this list, but the resorts and movie businesses are holding back DIS. I think that the pop today proves that notion out. So it’s on the list.
Cedar Fair (FUN)
Live Nation (LYV)
I believe that professional sports will have a high priority as a signal that we want to go back to “normal.” I’m not sure if there are other public entities that represent professional teams. Here are two I presented last time.
Madison Square Garden (MSG), the spin-off is actually up today, where holders of MSG should receive the entertainment share. I would advise doing the research before you acquire shares. I would wait as some might choose to sell the sports portion, and hold the entertainment. Perhaps the opposite. The point is, there’s time to do the research and decide. I’m obviously making the case that the sports piece has value as the NBA restarts the season.
My Trades: I went long on DEAC CALLs. I closed out my MongoDB (MDB) calls for a few bucks to pay for it. The reason I went long on Diamond Eagle Acquisition (DEAC) is that this week will be the official vote on the reverse merger that will create Draft Kings (DKNG). I also own warrants of DEAC. I don’t use the symbol for the warrants because I don’t want to over-promote. I intend to convert the warrants to the shares at some point. I think DKNG will grow into a decent valuation as professional sports come back as a beloved pastime. Sports betting is equally loved and my notion is that retail investors will want to own DKNG. This is not a fast money trade for me. Do your own research, understand warrants and don’t just follow me into them. Also, do some reading up on SPACs. DEAC is up sharply in the last two weeks but it also fell very hard prior to the news of the cancellation of all the professional sports. This is not a widow’s and orphan’s type of investment.
Disclosure: I am/we are long GILD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long DEAC, in Calls and Warrants. I own ABBV, BMY, and WFC in equity