Why Investors Shouldn’t Chase ‘Coronavirus Winners’

With global stocks in a coronavirus response-driven bear market, many may be tempted to target companies with purportedly bright prospects despite—or perhaps because of—COVID-19. But in our view, doing so calls for caution. Many of the reasons these stocks have bucked the overall trend are very well known, suggesting investors need another, more forward-looking thesis to own them. Absent this, targeting coronavirus “winners” smacks of buying based on past returns—heat-chasing, which has burnt many an investor over time.

From this global bear market’s start on February 12 through March 23—its low to date, though more lows are possible—just 1.3% of MSCI World Index stocks were positive.^[i] Just 0.3%—5 companies—were up by 10% or more.^[ii] Perhaps that seems extreme, but in our experience, it isn’t that uncommon for bear markets. The few positive outliers have garnered much attention as “bear market safe havens” and “coronavirus winners.” This eclectic bunch includes streaming and videoconferencing services, e-commerce firms, grocery stores and their suppliers, producers of household goods like cleaning supplies, video game makers, networking software providers, a company that manufactures masks, a pizza deliverer and several healthcare firms.

It isn’t hard to see why these companies would be outperforming in the very bizarre circumstances we now find ourselves in—where large swaths of most developed economies are shuttered and governments are telling citizens to stay home as much as possible. More folks are ordering goods online, cooking their own meals, watching videos and gaming in lieu of gathering. Businesses still operating are upping their use of video conferencing as more employees work from home. Meanwhile, the hunt for a vaccine or treatment continues apace. In this environment, fleeing down stocks for these winners may be enticing.

However, owning a stock merely because it has done well lately is a form of heat-chasing. While normally associated with bubbles and broadly optimistic sentiment, we think this common tendency is relevant now, too, as some seek any port in a storm. Companies benefiting from recent, sudden changes in society’s basic functioning seem like obvious targets. But owning or buying a stock today is always a decision about what will be in favor tomorrow (figuratively, not literally tomorrow).

In our view, heat-chasing is unwise for several reasons. First, it amounts to trading on widely known information. The aforementioned shifts in consumer and business demand are incredibly widely discussed. They are why those stocks are up—markets anticipated the positive effect on these firms’ profits and bid them higher. Hence, we think investors considering these companies should ask themselves: How much of current winners’ coronavirus boost do stocks already reflect? Can future reality top this? What do I see that most other market participants seemingly miss? How might this “winner” keep winning? What could make it reverse or lag?

If coronavirus containment-driven societal shifts persist and grow, maybe the current slate of winners outperforms for longer. But we see reasons to think otherwise. What if lockdowns increasingly look set to end sooner than expected, hastening the time when life can regain some semblance of normalcy? Shares of currently beaten-down companies that rely on people gathering may lead instead. If lockdowns last longer—or the spending shifts they spurred persist to some extent—then current top performers’ success may continue, too. But in this scenario, we would expect way more competition to emerge. Investors seeking profit opportunities funnel capital to where it is most needed. If the world needs way more pizza deliveries and sanitizer wipes from now on, new and existing companies will race to meet that demand. This could squeeze profits (and returns) for firms currently facing relatively less competition.

Heat-chasing can also skew portfolios towards just a few sectors—not great for diversification. For example, of the 21 stocks with positive returns between February 12 – March 23, 13 are from just two sectors—Consumer Staples and Health Care.^[iii] Energy, Materials and Financials are absent, and there is just one company from Information Technology—the MSCI World’s largest sector, comprising 19.7% of the total.^[iv] Portfolios lacking broad exposure can increase volatility and the likelihood of missing gains. Owning some coronavirus winners as a small part of a diverse portfolio is ok. If yours is well-diversified, you may own some already. But building very large positions is an enormous risk—and even for smaller positions, make sure you have forward-looking reasons to hold them, not merely ones tied to the virus or returns over the past two months.

In a bear market, the urge to take some action, almost any action, can be difficult to resist. But in our view, succumbing to this short-term thinking could mean basing your portfolio on the recent past, thereby positioning it poorly for the broad market recovery we anticipate. Hence, we believe thinking long term and sitting tight remains the best course.