Is Buying a Basket Loaded With Every Coronavirus Vaccine Stock a Smart Strategy?

The entire world anxiously awaits good news in the race to develop a vaccine for novel coronavirus disease COVID-19. And there are plenty of drugmakers hoping to be the bearers of some good news, including both big pharmaceutical companies and small biotechs.

Some investors could be tempted to try to pick the most likely winner among these and other stocks of drugmakers with COVID-19 vaccine programs. But there is another approach: Buy all of the stocks. Is investing in a basket of coronavirus vaccine stocks a smart strategy?

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A COVID-19 vaccine basket

BIO, the biggest trade group representing the biotechnology industry, currently lists 28 companies that are actively involved in developing COVID-19 vaccines. Here are the 21 of those drugmakers that are publicly traded:

We can add at least two other stocks that aren't on BIO's list, though. AstraZeneca (AZN +0.00%) teamed up with Oxford University to manufacture and distribute the COVID-19 vaccine being developed by the Jenner Institute and Oxford Vaccine Group. Also, TranslateBio (TBIO +0.00%) is working on an experimental COVID-19 vaccine in partnership with Sanofi.

You could invest roughly the same amount in each of the 23 stocks. Alternatively, you could weight your investments by market cap, with more money in big pharma stocks like J&J than in tiny stocks like Geovax Labs.

The worst-case scenario

What's the worst thing that could happen with investing in a basket loaded with COVID-19 vaccine stocks? It's possible that all of the companies' vaccines flop. But how bad would that really be for investors? It depends. 

Several of the smaller biotech stocks on the list have skyrocketed so far this year based primarily on high hopes for their coronavirus vaccine programs. If their experimental vaccines are unsuccessful, the bubble will pop with these stocks crashing. For example, Vaxart is up nearly 700% year to date. It seems reasonable to expect that most if not all of this gain would evaporate if the biotech's COVID-19 program comes up short.

On the other hand, the big pharmaceutical companies wouldn't see their stocks fall all that much if their coronavirus vaccine efforts failed. Even some of the smaller biotechs have other programs have other promising candidates that could at least partially cushion the repercussions of a COVID-19 flop. Novavax is a great example, with solid prospects for its NanoFlu flu vaccine.

If you used a market-cap-weighted approach, your downside risk probably wouldn't be too great with a basket investing strategy. But if you invested equal amounts in each stock of these COVID-19 vaccine developers, an across-the-board whiff would almost certainly result in a huge loss. 

The best-case scenario

Now that we've looked at the doomsday scenario, let's put on some rose-colored glasses. Determining the best-case possibility for a basket investing approach, however, is a little tricky.

If one of the big drugmakers such as J&J or Pfizer is successful while the smaller biotechs fail, the equal-weighted basket strategy wouldn't fare too well. Why? The negatives for the unsuccessful stocks would outweigh the pluses for the big pharma stock. The market-cap-weighted basket approach would undoubtedly be better in this scenario. However, it's still possible that the overall return of the COVID-19 vaccine basket wouldn't be anything to write home about.

It would be much better if at least one of the smaller biotechs has the most success with its COVID-19 vaccine program. Moderna appears to be one of the top contenders. The company plans to begin a late-stage study of its experimental COVID-19 vaccine in early summer. 

Image source: Getty Images.

Let's assume that Moderna's vaccine is successful and the other drugmakers' candidates aren't. Let's also assume that Moderna charges $50 per vaccine, that immunization is required annually, and that 3 billion people are vaccinated each year. That would give the company $150 billion in annual revenue and probably cause Moderna's share price to multiply at least 24-fold if not more.

This kind of return would be more than enough to offset any declines from the other stocks in an equal-weighted basket. Remember that the big pharma stocks probably wouldn't be negatively impacted too much if their vaccine programs fail. Even if all of the other small biotech stocks lost 100% of their value (which wouldn't happen), an equal-weighted basket strategy would pay off handsomely in this situation. The return would likely be even better if one of the small biotechs who are dark horses in the COVID-19 vaccine race and don't have a big partner ended up as the sole winner. 

The most likely scenario

There's no way to know for sure what will happen with the COVID-19 vaccine development programs. My best guess, though, is that several vaccines will be safe and effective enough to be used -- potentially including those of big drugmakers such as AstraZeneca and J&J.

J&J has publicly stated that it would price its COVID-19 vaccine at as little as $10 per dose. This would likely cause any other companies with successful vaccines to adopt similar pricing. If we assumed 3 billion vaccinations per year worldwide, the total market would be in the ballpark of $30 billion. With multiple winners in the vaccine race, this market would be split among several vaccines.

The overall return of an equal-weighted basket of COVID-19 vaccine stocks could be positive in this scenario. However, there's no way to know just how positive it might be because of all of the variables in play.

Smart strategy?

In the final analysis, my view is that investing in a basket of stocks of companies with COVID-19 vaccine programs isn't necessarily a horrible approach but certainly isn't a sure-fire way of making money. There's always risk involved in investing. Always.

I think that a better approach is to invest in the stocks on our list that would be good picks regardless of what happens with their COVID-19 vaccine programs. I especially like Pfizer, Lilly, and Johnson & Johnson among the big drugmakers and Emergent BioSolutions and Novavax among the smaller biotechs. (Note, though, that Emergent BioSolutions isn't developing its own COVID-19 vaccine but has deals in place to manufacture vaccines for other companies. Emergent does, however, a plasma-derived COVID-19 therapy in development.)

If these companies' coronavirus vaccines flop, they all still have solid growth prospects over the long run. And you've got a lottery ticket of sorts that would pay off if their COVID-19 vaccines are successful. I think a smaller, focused basket of these stocks should be a smart strategy for investors.