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Signum Research

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Joaquín Sánchez

Joaquin Sanchez, CFA
07.apr.20

Signum Perspectives

Investment Ideas in the Context of Covid-19

The coronavirus pandemic has changed people’s lives and in some cases the business sense of entire industries.

Much has already been written about the sectors impacted by Covid-19 and the looming economic recession.

Nevertheless, this season, there are sectors whose growth rates are set to surpass both historical levels and those of other industries which will witness a drop in their sales volumes.

This report contains investment ideas for 32 companies in sectors poised to benefit from the health crisis as well as three dollar-denominated indexed funds that are part of the international quotation system (SIC) that have outperformed the market, at least in 2020.

Our sample includes well-managed companies with low debt levels whose results will continue to outperform in the event the pandemic overhauls people’s lifestyles.

Sectors in the sample include pharmaceuticals, supermarkets, drugstores, household care (disinfectant), on-line education services, on-line entertainment, videogames and e-commerce.

Given the growing possibility of a global recession, we included the precious metals sector as a safe-haven asset; indeed, the three indexed funds mentioned above count such metals among their holdings and therefore follow their price performance.

Household Care

Our top picks in this sector are Clorox, (CLX*), Church & Dwight Company (CHD*) & Kimberly Clark (KMB*). Demand for disinfectants and disposable cleaning and sanitation products will increase in order to stop the virus from spreading. Toilet paper, for example, with a per capita consumption of US$17.50 in the U.S., the highest in the world, has already been the target of panic buying.

Clorox has proven very defensive since the pandemic began, rallying 7.1% since February 19th, not considering the exchange rate effect. By contrast, the S&P 500 plunged -27% over the same period.

Although the market consensus is negative potential and its multiple is higher than the industry, solid growth forecasts for the company’s main disinfectant products justify the rally.

Furthermore, all three companies have low levels of debt and high intrinsic profitability, and are therefore a buy opportunity based on volume growth.

Supermarkets and drugstores

Our top picks in this sector are Walmart, Inc., (WMT*) Target, (TGT*) Costco, (COST*) Kroger (KG*) and drugstores Walgreens (WBA*), and CVS (CVS*).

The current pandemic calls for social isolation and implies greater consumption of medicine to treat the illness.

We have identified double-digit price increases in chemicals and disposable items, frozen products and snacks compared to last year as well as in staple foods like eggs, milk and dairy products.

We therefore believe the pandemic will boost sales in those segments.

However, both Kroger and U.S. drug companies are very indebted and the former has relatively less upside potential.

We like CVS and Walgreens for their medical centers, as sick people and those needing tests will boost traffic, which will ultimately translate into higher sales floor profitability.

Pharmaceuticals

Our top picks in this sector are Moderna, Inc. (MRNA*), Regeneron Pharma (RGEN*), TEVA (TEVAN), Pfizer, Inc. (PFE*), Glaxosmithkline (GSK*), Inovio Pharma (INO*), Jhonson & Jhonson, Inc. (JNJ*), Gilead (GILD*), Abbvie (ABBV*), and the French company SANOFI (SNYN).

All of these biotechnology companies engaged in finding a vaccine and treatment for COVID-19.

Moderna and Inovio are two low market cap companies in the advanced stage of testing a vaccine applied to the mass population. There is a collaboration agreement in place with the U.S. Department of Health and other large companies like JNJ* and PFE* for its distribution.

At the same time, the U.K.’s GSK and France’s SNY are investing in two different approaches to finding a coronavirus vaccine. Vaccines account for more than 18% of GSK’s portfolio and SNY has successfully developed vaccines against influenza and Ebola.

Regeneron Pharma is developing an antibody that is used to fight Ebola for use in infected patients and the company’s CEO, George Yancopoulos, has said it will be ready by August.

Both Gilead and Abbvie have developed anti-viral drugs to contain HIV and the drugs Redesmivir and Kaletra have been successfully used in China and Thailand to prevent complications in patients with Covid-19.

Finally, TEVA could distribute Hydroxychloroquine, which was recently mentioned as a possible treatment for Covid-19 in the U.S. However, leverage and legal issues with opioids in the U.S. constitute risks.

On-line Education Services

Our top picks are the Chinese on-line education companies Tal Education Group (TALN) and New Oriental Education (EDUN) as well as the U.S. online work and health service companies Citrix, Inc., (CRTX*) and Teladoc (TDOC*).

The former two companies, which have raised their earnings guidance, provide one-on-one on-line languages and science courses, while TAL also has a parental education app.

Citrix offers on-line business meeting and conferencing services. Teladoc offers on-line health consulting and prescriptions, although EBITDA is currently negative. These companies have gained 18 and 32% respectively, since February 18th.

E-commerce sector:

Restrictions derived from social distancing have undoubtedly underpinned e-commerce volumes.

AMZN has experienced volume growth, and while the stock has corrected in dollars since the middle of March, the correction has been less than for the market as a whole.

In the case of BABA and JD, the pandemic has underscored strong growth trends. BABA offers online pharmacy services in three formats: TMALL for luxury products, Taobao, which is a massive e-commerce service, and Juhuasuan, which is tailored to China’s low-income segment and rural areas, giving them broad market coverage.

JDN has its own logistics infrastructure that has enabled it to maintain double-digit growth rates.

Mercado Libre is a clear buy opportunity due to a strong correction (indeed, along with TEVA, the correction has surpassed the overall market) while growth in its main regions (Argentina and Brazil, which account for around 65% of total sales) has continued at double-digit rates and in Mexico at an even more impressive triple-digit rate.

On-line Entertainment

This is another sector that has experienced above-market growth as a result of social distancing and isolation measures. Companies like Netflix, Spotify and videogame companies should see their results, average revenue per user (ARTU) and number of subscribers positively impacted by the pandemic.

But while companies such as these should experience strong rebounds, other more traditional industries such as construction, retailing, manufacturing, mining, real estate and tourism will be dealt severe blows that will inevitably bring on a major global recession.

That is why we believe that in the current environment, investment portfolios should include safehaven assets like precious metals. Regarding this, we like two investment funds indexed to gold with physical reserves whose prices replicate the performance of this metal.

We also recommend a fund that is indexed to palladium, a mixture of platinum and nickel used in the renewable energy and auto sectors whose reserves are currently limited.

As these sectors are set to benefit from the Covid-19 pandemic, we are including them in our investment portfolio.

Investing in SIC securities also provides a natural dollar hedge in key sectors, so returns should be superior.



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