Don’t Chase the Vaccine Hunt

Editors’ Note: MarketMinder doesn’t make individual security recommendations. The below merely represent a broader theme we wish to highlight.

With two companies now reporting positive advanced trial results for a COVID vaccine—with big share price booms accompanying their announcements—investors’ interest in vaccine candidates is at fever pitch. 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 heat chasing ignores markets’ efficiency and fundamental considerations, and we think investors are best off not speculating in this arena (or at all).

Nine months (or so) into the pandemic, we have lost count of the number of articles hyping Pharmaceuticals and Biotech stocks as surefire winners, all because they anticipate sky-high demand for COVID treatments and vaccines being stock price rocket fuel. Any investing thesis this long-lived and widespread must already be discounted in share prices, to some extent. To say there is material surprise power left is to argue markets aren’t efficient. That doesn’t negate the possibility for short-term boomlets as vaccine news comes out, as we saw with Pfizer and Moderna this month, but that is mostly sentiment—fleeting and unpredictable. Plus, investors seeking longer-term growth need a lot more than a one-day price pop. To us, that longer-term growth comes from a steady drip of positive surprise.

One source of positive surprise? Earnings beating expectations. In our view, it is highly questionable that a COVID vaccine is a positive on this front. Societally and economically it is potentially huge. But profit-wise? Many developers have already entered contracts with the US and other major governments to supply massive quantities of vaccines at cut-rate pricing. Governments even helped finance some of these. The sheer number of developers at work means competition will be stiff.

Beyond this, vaccines aren’t huge moneymakers for Pharmaceuticals firms. They cost a lot to develop, sell for little, and are a one-time purchase for each customer. A COVID vaccine will be no different. The entire world may seek inoculation, but after society has gained immunity, demand will dry up. We won’t go so far as to say companies are pursuing vaccines solely as a public service, but this is basically the medical equivalent of grocery stores selling bananas and rotisserie chickens at cut-rate prices. Revenues from other products subsidize them.

Mind you, we aren’t bearish on Health Care, Pharmaceuticals or Biotech. But in our view, your 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, in which case, great. But don’t let your decision hinge on that.

Beware, also, of the mindset driving the enthusiasm for COVID vaccine developers: heat chasing. It is a common affliction in bull markets, especially on the heels of a huge run-up like the one stocks have enjoyed since late March. But it amounts to trading on past performance and widely known information—always a big no-no. Markets are forward-looking, and they look hardest at the gap between reality and expectations over the next 3 – 30 months. Your investment decisions should have that same focus, in our view.