Thesis

Pfizer (PFE) and BioNTech (BNTX) have released data that indicate that their vaccine candidate is highly efficient. The vaccine candidate is not yet approved, but it looks like that could happen in the not-too-distant future. This has a huge impact on both the two pharma companies involved in the vaccine candidate’s development, and also on many more companies from a range of industries, and the economy as a whole. This article takes a look at sectors and companies investors should keep an eye on right now.

COVID vaccine bullish, bulls and bearsSource: Seeking Alpha’s image bank

2020 has been a year during which markets experienced a lot of volatility, both bears and bulls had big winning streaks. Right now, bulls seem to be in control, following election results and this very positive vaccine news item.

What Pfizer And BioNTech Announced

Diversified biotech/pharma company Pfizer announced that its coronavirus vaccine candidate BNT162b2, developed with Germany-based BioNTech, had achieved 90% effectiveness in preventing COVID-19 infections. This is believed to be a very solid result. More than 90 cases were evaluated by Pfizer and BioNTech, and no safety signals were observed, which may indicate that this is a quite safe and reliable vaccine candidate. It should be noted, however, that BNT162b2 is not approved yet, and it is possible that problems may arise in the future. For the moment, however, it looks like this candidate is very promising, an emergency use application is expected towards the end of November. This could potentially lead to a roll-out as early as December 2020, for example in the UK.

Both Pfizer and BioNTech headed higher following this announcement, which wasn’t a surprise, as this could lead to billions in additional revenues for these two companies. In October, we called Pfizer an attractive stock, due to an overall inexpensive valuation and potential due to its leadership position when it comes to developing a coronavirus vaccine. So far, this call has worked out well, with shares up by double-digits in less than a month.

A vaccine, however, naturally impacts many more companies apart from the developers, which is why we will take a look at a range of impacted stocks and industries.

Oil/Energy

Oil prices headed to all-time lows earlier this year, as demand was hit very hard, due to less travel and stay-at-home mandates. With a vaccine on the horizon, however, the picture for the industry has changed a lot. People will be commuting to their office again, air travel should continue to recover, and overall economic output will continue to recover – all of that is good for oil demand. On the day of the vaccine announcement, oil prices (CL1:COM) rose by ~10% (at the time of writing), breaching $40 once again.

This has, of course, also improved the outlook for oil producers (XLE), and everyone related to that industry. Oil equipment manufacturers such as Schlumberger (SLB) headed higher, pipeline companies headed higher, as their customers will likely be in a better financial position, and last but not least, refiners have seen big gains. Refiners will benefit from improving refining margins going forward, as demand for gasoline and kerosene picks up again, which is positive news for Phillips 66 (PSX), Marathon Petroleum (MPC), and others. Among oil producers, integrated players such as Chevron (CVX) and Exxon Mobil (XOM) are poised to benefit from both factors, i.e. higher oil prices for their upstream segment, and improving margins and sales for their refining and marketing business. With many of these stocks still down 50% or even more from pre-Covid levels, there seems to be enormous upside potential over the coming quarters and years, as things should continue to normalize. If, for example, Phillips 66 were to rise back to $120, that would be another double, even following sizeable gains on Monday.

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Travel

Airlines (JETS) and cruise lines such as Carnival (CCL) were among the hardest-hit stocks during this crisis, as demand for their offerings crashed to new lows. With a vaccine looking likely in the foreseeable future, their business outlook has improved a lot, however. Once most people, and especially vulnerable persons, have been vaccinated, operations should normalize, and profits could revert back to pre-crisis levels. Many of these stocks have already recovered significantly since their March lows, but there could still be more gains in the tank for Southwest (LUV), Delta Air Lines (DAL), etc. They will not offer shareholder returns (dividends/buybacks) in the near term, however, and their balance sheets have been hurt a lot during this crisis, so these aren’t necessarily the best recovery plays, we believe. Other tourism-related stocks such as trivago N.V. (TRVG) will be beneficiaries of a vaccine rollout as well.

Real Estate

Apartments

Home prices held up very well during this crisis, and the housing market overall was a source of strength for the US economy over the last couple of months. In some markets, however, issues arose. In New York and some West Coast cities, for example, increasing work-from-home and high real estate prices led to moves towards suburbs, which has hurt the rent collection and average sales for apartment REITs such as Essex Property (ESS) and Equity Residential (EQR). A vaccine rollout will likely mean that people will not work from home as much, which should stop the moving-out-of-major-cities trend. Since share prices for some of these apartment REITs were well below NAV, and since dividend yields were at above-average levels, they could be attractive investments as a recovery play.

This is even more true for other real estate sectors, such as the following:

Senior Housing

REITs such as Omega Healthcare (OHI) and Ventas (VTR) are still down 30%+ this year, even after nice gains on Monday. Once the vaccine is fully rolled out, operations at senior housing facilities should be back to normal, which means that there is no good reason why shares can’t eventually climb back to pre-crisis levels. Combined with high dividend yields, that could make these stocks attractive.

Office Space

Work-from-home trends have pressured office REITs to a large degree, and companies such as SL Green (SLG) and Boston Properties (BXP) are still down 40%+ this year, even following Monday’s gains. A vaccine rollout will lead to more demand for office space, and it seems reasonable to assume that these companies will see benefits over the coming quarters. Valuations are highly attractive in this space, and when one goes with high-quality picks with class-A properties, risks are not overly high, we believe.

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Retail

Mall REITs and owners of standalone retail real estate have seen their shares crash in 2020, but with a vaccine on the horizon, their long-term outlook has improved a lot. Quality matters a lot in this space, as weaker players were already experiencing a lot of problems before this crisis. The stronger players, however, such as Simon Property Group (SPG), are poised to gain market share as weaker players go bankrupt and their underperforming malls close down. With shoppers returning to malls in force once a vaccine is rolled out, profits should eventually recover to pre-crisis levels – and share prices should do the same.

ChartData by YCharts

Many of these stocks have seen huge gains on Monday, but at the same time, they are still down a lot from the beginning of the year, thus further upside exists. We previously published bullish reports on Simon Property, Brookfield Property (BPY), Federal Realty (FRT), and Realty Income (O). We think more gains could be coming for these stocks over the coming quarters and years.

Banks

Bank stocks got under a lot of pressure this year due to worries about interest rates and higher credit losses. Recent quarterly reports showed that banks are well-positioned when it comes to credit losses, due to high provisions in Q1 and Q2, but low long-term rates still kept a lid on share prices. Following the vaccine news, treasury rates rose meaningfully, however, which could be positive for the future profitability of major banks. They will also benefit from rising credit card purchase volumes and other factors that come with economic recovery. JPMorgan (JPM), Bank of America (BAC), Citigroup (C), and others were very attractively priced in recent weeks, and despite sizeable gains on Monday, it may not be too late to enter a position.

Entertainment

Some entertainment companies have seen their business models get hit hard during this crisis, such as cinemas, bars, clubs, restaurants. Once a vaccine has been rolled out, their business models will be viable again, and results should improve. I’m not a fan of cinema stocks, as they had some problems even before this crisis, but others, such as Disney (DIS) with its movie business and theme parks, or AT&T (T) with its movie business will benefit from a vaccine rollout for sure – and they could be attractive buys.

Stocks You May Better Avoid

There were stocks that benefited from the current pandemic and the changes it forced on our lives, such as work-from-home enabling tech. I think that Zoom Video Communications (ZM) and other recent high-flyers, which looked quite overvalued this summer and fall, could have more downside once the vaccine is rolled out and things revert back to a pre-crisis way of life.

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Online shopping will not go away, and I wouldn’t bet against major players such as Amazon (AMZN) or Alibaba (BABA), but I wouldn’t want to be in smaller high-flyers such as Shopify (SHOP), trading at 250 times forward earnings.

Consumer staples companies (XLP), and essential retailers also have seen their shares perform well this year, as stockpiling has resulted in solid sales for these companies. Walmart (WMT), Target (TGT), Colgate-Palmolive (CL), Procter & Gamble (PG), and others have been solid pandemic picks, but they will likely not see the sales growth they experienced in 2020 going forward, especially once a vaccine has been rolled out. At the same time, they trade at above-average valuations, which is why we warned against them not too long ago. Following Pfizer’s vaccine news, they are underperforming the market, and that could hold true for a while.

Takeaway

It is great news that Pfizer and BioNTech’s vaccine candidate has promising properties – for everyone, even when we fully back out investing. But this community is about investing, and naturally, this news item also impacts one’s investments to a large degree. If the vaccine does indeed get approved and rolled out soon, that would be very positive for the economy overall, and a range of industries should benefit. When companies from these industries that will see a boost are trading at cheap valuations, that could be an attractive investment opportunity, and we think there are several candidates for that in this article. Not all companies that will benefit will necessarily be great investments, however – those companies with major problems even before the current crisis are ones we would avoid, e.g. cinemas and lower-grade malls.

One should also note the companies that will see pressure on their operations and/or valuations once the vaccine is available, with recent high-flyers that are trading at very high valuations (e.g. Zoom) being especially noteworthy.

One Last Word

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Disclosure: I am/we are long BPY, SPG, SLG, MPC, PSX, OHI. 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.



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