COVID-19 is a black swan event, one of those unpredictable disasters that can ravage investor returns. The stock market is a forward-looking mechanism. We invest in companies we believe will do better in the future. COVID-19 creates a bearish scenario -- we now believe the vast majority of companies will do worse over the next few months.
The NCAA basketball tournament was just canceled. South by Southwest is not happening. St. Patrick's Day celebrations are off. Schools, restaurants, and gyms are all being indefinitely closed. Instructions from government officials and health experts to practice social distancing affects many consumer-facing businesses. And the worst part is that we still don't know how bad the COVID-19 outbreak will be.
If we have more surprising bad news -- an escalation in the number of people who catch the disease, or the number of people who die from it -- the market will continue to crash. One way I respond to this uncertainty is to own a couple of healthcare companies that are responding nimbly to the menace of COVID-19. While most of my portfolio is getting killed right now, these two stocks are thriving.
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Working on a COVID-19 vaccine
When vaccine specialist Novavax (NVAX -3.45%) announced it was working on a preventative drug for COVID-19, the stock shot up dramatically. At one point, shares quadrupled in value to $16. Since then the stock has been sliced down to $8.93 on Tuesday. Double-digit moves seem to happen almost every day with this small-cap biotech.
Novavax is unprofitable and has no approved drugs yet, so it's a risky stock. But it's also in a sweet spot right now as people are really starting to focus on preventing deaths from infectious diseases. Novavax's major drug is NanoFlu, a vaccine for the flu that is finishing up phase 3 trials this month. Novavax is expected to announce its test results in a few weeks.
Novavax bulls are excited about this flu drug because NanoFlu has been outperforming the market-leading flu vaccines from Sanofi (SNY 0.65%) in all the trials so far. And this is big news because the flu kills hundreds of thousands of people worldwide every year, making flu vaccines a $5 billion market opportunity. Novavax's valuation is still tiny ($563 million) compared with that opportunity.
Still, what's been driving the stock this year is not the flu, but rather the panic over COVID-19. It's a new disease, and yet Novavax was able to introduce a vaccine candidate very quickly. Phase 1 trials are expected to start this spring. Normally it takes drug companies eight to 10 years for vaccine development. As we saw with NanoFlu, that timeline can be escalated. Novavax started testing NanoFlu in ferrets in 2017 and two and a half years later, the drug is finishing its phase 3 trial in humans.
Novavax would like to move its COVID-19 drug through clinical trials at an even faster rate. Certainly, the government would like to get a vaccine to market as soon as possible. Tony Fauci, the head of the National Institute of Allergy and Infectious Diseases (NIAID), believes we might see COVID-19 drugs available to the public in a year to 18 months. Greg Glenn, the president of research and development at Novavax, said that schedule was "aggressive but possible."
Ramping up tests for COVID-19
When President Donald Trump declared a national emergency over COVID-19 on Friday, that freed up $50 billion in federal money. A fair amount of that money will be used to escalate COVID-19 testing, which should be a boon to diagnostic companies including LabCorp (LH -0.14%), Quest Diagnostics (DGX -1.27%), and BioReference Labs, a division of Opko Health (OPK 1.54%).
The market has already started rewarding this trio. On Friday, LabCorp jumped up 10%, Quest shares increased 7%, and Opko ran up 33%.
Image Source: YCharts
Why did Opko outperform the other two? One possible reason for this disparity is that Opko is a highly shorted stock. Almost 21% of its float is sold short. Apparently a lot of short-sellers were caught unawares on Friday, which might explain why the stock jumped so significantly.
Another reason is that Opko had some company-specific news on Friday: It announced a partnership with the New York State Department of Health to create a drive-through testing facility for COVID-19 in New Rochelle, where the disease has hit the community hard. The company plans to offer 5,000 tests a day across its various sites in New York.
While it's significant news, it's also a drop in the bucket compared to Trump's $50 billion announcement. That's a huge amount of money that will be used in the fight against COVID-19. LabCorp and Quest already have sizable revenues, over $11 billion and $7 billion, respectively. Opko had $900 million in revenues last year, mostly from its diagnostic division.
In the president's speech, he said that 1.4 million COVID-19 test kits will be available in a week, and 5 million in a month. Tests for COVID-19 currently cost $1,331, according to Representative Katie Porter. That works out to about $6.6 billion that will be spent on COVID-19 testing over the next month. LabCorp, Quest, and Opko should see a significant amount of that money.
Rather than panicking about the unknowable future of the coronavirus pandemic, investors should weigh which of these winning stocks to add to their portfolios.
