The severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2 for short, is almost certainly going to continue dominating headlines during the month of March. As such, investors should probably brace themselves for more tough days ahead.
There are some proactive steps that investors can take to mitigate the impact of this black swan type event, however. One of the most powerful is to use a trick employed by most professional money managers called hedging.
The concept of hedging is fairly straightforward. The basic idea boils down to buying "insurance" against a specific risk factor.
While hedging can take several different forms, one simple way to protect against downside risk is to buy equities expected to benefit from a particular event. In today's dour market, you should be able to successfully hedge your portfolio against the SARS-CoV-2 outbreak by buying shares of companies working on treatments for this respiratory ailment or selling products likely to see a boost in sales due to the spread of the virus.
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Which stocks are the best hedging vehicles against the SARS-CoV-2 outbreak? Alpha Pro Tech, Ltd. (APT +0.00%), The Clorox Company (CLX +2.11%), Co-Diagnostics, Inc. (CODX +6.85%), Gilead Sciences (GILD 0.66%), Inovio Pharmaceuticals (INO +2.59%), Moderna, Inc. (MRNA 1.81%), and Novavax (NASDAQ: NVAX) are seven names that could help to minimize the impact of this deadly respiratory infection on your portfolio in March. Here's what investors need to know about each company.
Alpha Pro Tech: A protective apparel play
Alpha Pro Tech's stock is already up by an astonishing 517% this year in response to SARS-CoV-2.
The company's tie-in to the outbreak is its N-95 face mask. Last week, management announced that the company had already booked a whopping $14.1 million in sales of the N-95 face mask since Jan. 27, and that demand for the mask remained strong. Depending on how long the outbreak lasts, Alpha Pro Tech might be able to significantly improve its gross margins, free cash flows, and cash balance over the course of 2020.
That being said, there was a very good reason this company was a micro-cap before this viral outbreak; namely its anemic growth rate. So, if demand for the N-95 softens, its stock could quickly give back all of these gains. In short, Alpha Pro Tech isn't the greatest hedging instrument against SARS-CoV-2 due to its already monstrous run-up. But it might be worth owning a few shares of this protective apparel maker if the crisis deepens.
The Clorox Company: Disinfect your portfolio with this Dividend Aristocrat
One of the most obvious ways to hedge against the SARS-CoV-2 outbreak is by buying companies that make disinfectants, and Clorox is the king of the hill in this regard because of its namesake bleach. Clorox bleach, in fact, reportedly kills 99.9% of germs on contact, presumably including the human coronavirus.
So far, the company isn't experiencing a surge in demand for its household cleaners, but that may soon change as the outbreak spreads across the United States. That's the main reason its stock has been one of the few winners in this volatile market over the past week.
As an added bonus, Clorox is also a Dividend Aristocrat, thanks to its impressive track record of boosting its dividend for 43 consecutive years. The downside is that Clorox's shares are on the pricey side, at over 27 times forward-looking earnings. So, it's probably best to go light on this name as a pure hedge play against SARS-CoV-2, despite its prospects as a strong passive income generator.
Co-Diagnostics: A better mousetrap
Co-Diagnostics' stock has taken flight this year in response to this respiratory disease, thanks to the rapid development of its easier-to-use molecular diagnostic test known as the Logix Smart Coronavirus COVID-19 test. The company still has more work to do to make this molecular diagnostic test commercially available across the globe, but it did receive a CE mark approval in the European Union earlier this month.
The long and short of it is that Co-Diagnositics may have the gold standard for testing for the virus, which could be a boon for the company from a revenue standpoint.
The drawback is that it's completely unclear what kind of revenue this test may be able to generate. Investors seem to think that Co-Diagnostics will experience a ginormous windfall from this viral threat, but that remains to be seen. In other words, this is another hedge play that probably only deserves a small spot in your portfolio right now.
Gilead Sciences: A leader in the fight against SARS-CoV-2
Last week, Gilead revealed that it was launching a pair of late-stage trials to evaluate the antiviral medication remdesivir as a curative treatment for the disease. Data from these trials could be available before the start of summer, perhaps paving the way for one of the quickest requlatory approvals in modern history. If so, Gilead may see a healthy jump in revenue during the latter half of the year, assuming this viral threat actually persists through the summer.
The knock against this large cap biotech stock is that the company has yet to push past its hep C woes. Gilead's top-line, in fact, has been stuck in neutral for awhile now and there's no telling when this unfavorable trend will reverse course. So, if you're interested in this top biotech stock solely for its tie-in to the SARS-CoV-2 outbreak, it might be best to tread lightly. Gilead, after all, may be unable to sustain these recent gains.
Inovio Pharmaceuticals: A potential vaccine
Inovio grabbed headlines last month when the company announced that it had successfully designed a novel vaccine to protect people against SARS-CoV-2. The experimental vaccine is known as INO-4800. Inovio said that it expects to begin human trials by summer. The biotech's stock, in turn, has gained approximately 30% this year on the heels of this news.
Like all coronavirus vaccine plays, however, Inovio may have trouble sustaining these recent gains. The core issue is that it takes an exceedingly long time to trial and gain a regulatory approval for any vaccine. That means that unless SARS-CoV-2 becomes part of the seasonal landscape of respiratory illnesses, Inovio's INO-4800 may never see the light of day.
Still, the market's fear over this viral outbreak should be enough to make this small-cap biotech stock a worthwhile hedge play for the entirety of the second quarter of 2020.
Moderna: A first-mover advantage
Moderna's stock has gained a noteworthy 32.5% during the first two months of 2020 due to its experimental SARS-CoV-2 vaccine mRNA-1273. Last month, the biotech company noted that it had shipped batches of the vaccine to U.S. governmental researchers at the National Institute of Allergy and Infectious Diseases in order to begin the clinical trial process. This trial is on track to get underway in April.
What's important to understand is that Moderna now has the inside track at bringing a vaccine to market for this respiratory disease. Again, though, this event could turn out to be a big nothing-burger at the end of the day. Having said that, the market seems content to continually bid this mid-cap biotech stock up in response to this viral threat -- a fact that makes it an excellent hedge play.
Novavax: A dual threat play
Novavax's stock has now gained a jaw-dropping 302% since the start of 2020. Not all of these gains, however, are the result of SARS-CoV-2. While Novavax has stated that it is developing a vaccine for this respiratory disease, and that human trials could start within the next few months, the company's shares are also likely surging because of the forthcoming data readout for the experimental flu vaccine NanoFlu. NanoFlu's pivotal trial data are due out before the end of the first quarter. The headline here is that a new flu vaccine might be worth billions in annual sales, which is clearly a needle-moving event for a company currently in small-cap territory.
Is Novavax a worthwhile hedge play regardless? This vaccine developer may be the riskiest of the bunch. If NanoFlu turns into a pumpkin, this small-cap vaccine company could be in serious trouble.
That's a harsh statement to be sure, but the company has repeatedly failed to hit the mark in late-stage trials. One more miss may cause investors to lose all confidence in Novavax's platform.
The good news is that NanoFlu's mid-stage data did paint an encouraging picture, and Novavax's stock is still grossly undervalued relative to this particular market opportunity.
So, if you're comfortable with owning an all-or-nothing type play, Novavax might be worth buying as both a hedge against the SARS-CoV-2 outbreak, as well as a speculative growth play.
