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How I Pick Approved Needles in a Vaccine Haystack

By Bradley Freeman – May 27, 2020 at 8:43AM

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How to profit off of the recent vaccine craze.

In the last few weeks, bio-tech companies of all sizes have made impressive strides toward a vaccine. Many dozens of approaches are being taken, most will fail. With a future potential coronavirus inoculation carrying such an overwhelmingly positive public utility, which company will win?

Choosing from the companies racing to the finish line is quite difficult, and also risky. Moderna (MRNA 3.87%) reported robust preliminary news of Phase I trials recently that sent shares soaring. Immediately speculation rose on the extensiveness of the data release, sending shares plummeting just one day later.

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Tough Game To Play

Moderna has reported similar promising results on different products for years, with no FDA approvals to date; they are far from alone. Wild stock swings will be common with positive and negative vaccine news. The headline risk is truly too great to ignore.

Even for companies lasting all the way through FDA's Phase 3 approval, profitability is far from a guarantee. Johnson & Johnson announced that they will sell any potentially approved vaccine at cost to maximize accessibility.

In this light, it is hard to imagine competing doses generating pricing power far beyond J&J when theoretically, competing products accomplish the same thing. Thankfully for society, biotech is taking a humanitarian approach, putting people over dollars. This could reduce political pressure on pharma in the future but may not yield impressive returns for profit-motivated investors.

An investment thesis I'm more confident in is that our highly capable biotech industry will arrive at a vaccine sooner rather than later. We have dozens of world-renowned companies aggressively pursuing over 100 candidates for a vaccine. Instead of choosing which will work, I'd prefer to pick the companies that will indirectly benefit the most from any vaccine coming online. One approved vaccine is a game changer for countless stocks, let's explore two.

Compelling Cruise Investment

Cruising caters solely to more durable leisure voyages expected to rebound faster and stronger than business travel. Confidence in a quicker recovery, paired with cruise stocks all 60% or more off their highs is quite the compelling setup. Three big players: Royal Carribean (RCL 16.65%), Carnival (CCL 13.29%), and Norwegian Cruise (NCLH 16.84%) own most of the market, creating an enviable market share and impressive pricing flexibility.

I personally prefer Royal Caribbean to its competition. Many of the headlines about infected cruise ships were boats owned by competitor  Carnival. Its balance sheet leverage is similar to Carnival's and significantly less stressed than Norwegian's.

Royal Caribbean yielded $9.50 in earnings last year, placing a trailing multiple of roughly 4x on the company. 2020 bookings will be weak, but executives stressed 2021 booking trends within 80% of 2019 with pricing remaining steady. It is reasonable to expect Royal Caribbean to approach pre-virus demand in the next business cycle. What if I'm wrong?

Only realizing half of past peak earnings would still make this company very inexpensive. The industry headed into to this pandemic enjoying incremental growth beyond global GDP. It will take time for nerves to calm, and passengers to return, but cruisers are eager sail again.

Investing in Baseball

Next, the Liberty Media Atlanta Braves Tracker (BATRK 1.58%) representing full ownership in the franchise. Additional assets include their new ballpark and surrounding real estate developments. This one is pretty straight forward. With an equity valuation of roughly $1.1 billion, there is intrinsic value to be had here. Forbes currently lists this MLB franchise at $1.8 billion. When a vaccine allows professional sports to return and stands to fill, it's hard to imagine this steep discount persisting.

Dozens of other quality stocks ranging from energy, to airlines, to theme parks and more stand to gain from any single vaccine's approval. These are simply my favorites. A world in which covid-19 poses little mortality risk to the population is a world where arenas can fill and life can go on once more. While I candidly have zero insight on which vaccines work the best, or how much money can be made, I do know the massive benefit to society is there. Picking best in breed companies from the rubble fostered by this pandemic is my way forward.

 

Bradley Freeman owns shares of Royal Caribbean. The Motley Fool recommends Carnival and Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
RCL
$43.85 (16.65%) $6.26
Carnival Corporation Stock Quote
Carnival Corporation
CCL
$7.76 (13.29%) $0.91
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
NCLH
$13.32 (16.84%) $1.92
The Liberty Braves Group Stock Quote
The Liberty Braves Group
BATRK
$28.25 (1.58%) $0.44
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$165.62 (1.48%) $2.42
Moderna, Inc. Stock Quote
Moderna, Inc.
MRNA
$125.67 (3.87%) $4.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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