Editors’ Note: MarketMinder Europe doesn’t make individual security recommendations. The below merely represent a broader theme we wish to highlight.
With three companies now reporting positive advanced trial results for a COVID vaccine—and big share price booms accompanying their announcements—investors’ interest in vaccine candidates is at fever pitch.[i] The thesis: If you can just pick the winner(s) in the vaccine race, quick riches will follow. Appealing, but in our view, wrong. This desire to buy company shares because of recent strong returns—which many financial professionals refer to as heat chasing—ignores markets’ efficiency and fundamental considerations, in our view. We think investors are best off not speculating in this arena (or speculating at all).
Nine months (or so) into the pandemic, we have lost count of the number of articles hyping Pharmaceuticals and Biotech shares as surefire winners, all because they anticipate sky-high demand for COVID treatments and vaccines being rocket fuel for these companies’ share prices. According to some arguments in financial publications we track, that fuel will benefit Health Care-related shares as well as firms hit hard by COVID restrictions—like airlines. However, we think any investing thesis that has been this widespread for so long must already be accounted for in share prices, to some extent. To say there is material surprise power left is to argue markets aren’t efficient, in our view—that people haven’t already been basing trades on this information. That doesn’t negate the possibility for short-term rallies as vaccine news comes out, as we saw with Pfizer and Moderna this month, but our analysis shows that is mostly sentiment—fleeting and unpredictable, in our experience. Plus, we think investors seeking longer-term investment portfolio growth need a lot more than a one-day price pop. In our view, that longer-term growth comes from a steady drip of positive surprise.
One source of positive surprise? Corporate earnings beating expectations. In our view, it is highly questionable that a COVID jab is a positive on this front. Societally and economically, a COVID vaccine has potentially huge implications. But profit-wise? Many developers have already entered contracts with the UK, US and other major governments to supply massive quantities of vaccines at cut-rate pricing. Governments even helped finance some of these vaccine candidates, as has been widely reported. The sheer number of developers at work means competition will be stiff. Besides Pfizer and Moderna’s progress, an AstraZeneca/University of Oxford vaccine has also shown promise—and UK officials have already placed orders for 100 million doses.[ii]
Beyond this, our research shows vaccines aren’t huge moneymakers for Pharmaceuticals firms. They cost a lot to develop, sell for little, and are usually a one-time purchase for each customer. A COVID jab seems like it will be no different. The entire world may seek inoculation, but after society has gained immunity, demand will likely dry up, in our view. We won’t go so far as to say companies are pursuing vaccines solely as a public service, but our research shows they generally rely on revenues from other products to help subsidise vaccine production.
Mind you, we aren’t pessimistic towards Health Care, Pharmaceuticals or Biotech shares. But in our view, a thesis to own any company, in these or other sectors, should depend on longer-term prospects that aren’t under a media microscope. In the Pharma and Biotech world, we think that means manufacturers of drugs and medical devices who have overflowing pipelines for treatments that will have strong demand from repeat customers. That means treatments for chronic conditions and longer-lasting diseases such as diabetes, hepatitis and cancer, to name just a few. In targeting these companies, you may find you own a vaccine producer or two. But we don’t think your decision to own a company should hinge on whether or not its COVID jab is successful.
Beware, also, of the mindset driving the enthusiasm for COVID vaccine developers: heat chasing. In our experience, it is a common affliction in bull markets (extended periods of rising share prices), especially on the heels of a huge run-up like the one equity markets have enjoyed since mid-March.[iii] But it amounts to trading on past performance and widely known information—always a big no-no, in our view. Our research shows markets are forward-looking, and they look hardest at the gap between reality and expectations over the next 3 – 30 months. Investment decisions should have that same focus, in our view.
[i] Source: FactSet, as of 19/11/2020. Statement based on Pfizer daily share price change on 9/11/2020 and Moderna daily share price change on 16/11/2020.
[ii] “Covid: Oxford vaccine shows 'encouraging' immune response in older adults,” Staff, BBC, 19/11/2020.
[iii] Source: FactSet, as of 19/11/2020. Statement based on MSCI World Index with net returns, GBP, 16/3/2020 – 18/11/2020.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.