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Hedge Against the Omicron Variant by Buying These 2 Stocks

By David Jagielski – Dec 29, 2021 at 5:45AM

Key Points

  • Pfizer and Quidel have seen their shares rise in the initial weeks following the emergence of omicron.
  • Between treatment and testing, these two stocks will have you covered if case numbers keep rising.

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Investing in key healthcare stocks can offset some of the investor risk related to the omicron variant.

Are you worried that the omicron variant will wreak havoc on your investment portfolio? If so, you may want to consider a hedge against that risk by investing in stocks that are likely to do well in the event that this new COVID-19 variant doesn't go away quickly. 

Two stocks that surged in the weeks following news of the latest variant were Pfizer (PFE 0.52%) and Quidel (QDEL). These are quality investments on their own and could be even more attractive to hold as possible hedges against omicron. Here's an in-depth look at each.

A group of scientists looking at a report.

Image source: Getty Images.

1. Pfizer

Pfizer has been leading the charge against COVID-19 with its highly effective vaccine. However, in December the company reported that two doses may not be enough to offer sufficient protection against the omicron variant and that a third shot should provide people with more neutralizing antibodies. Company data shows that with the booster, people will have similar levels of protection against omicron as a two-dose regimen had against earlier variants. 

For 2021 alone, Pfizer projects that revenue from its COVID-19 vaccine will top $36 billion and that next year it will bring in another $29 billion. However, depending on omicron and other variants, it's possible that the figure for 2022 could rise even higher, especially if additional boosters become necessary.

Plus, this doesn't even factor in its COVID-19 pill, Paxlovid, which could bring in another $17 billion in sales next year. The pill has shown an 89% effectiveness in reducing the risk for hospitalization or death related to COVID-19 if taken within three days of developing symptoms. On Dec. 22, the U.S. Food and Drug Administration authorized the pill under an Emergency Use Authorization. This permits high-risk patients to take it if they have a mild to moderate case, have tested positive, and are at least 12 years of age.

Since the World Health Organization designated omicron as a variant of concern on Nov. 26, shares of Pfizer have risen more than 9%, outperforming the S&P 500's gain of less than 4% during that period. The healthcare stock is a good buy in general (the company has generated profit margins of more than 20% in each of the past four years and is on track to do so again in 2021) and as a hedge against omicron, it makes an optimal investment to hang onto right now.

2. Quidel

Shares of testing company Quidel were also soaring following news of the omicron variant. The stock was looking like a big winner, hitting a high of more than $180 on Dec. 21 -- it hasn't traded at those levels since February.

However, on Dec. 23 the company announced a sizable $6 billion acquisition of another testing company, Ortho Clinical Diagnostics. The deal isn't necessarily a bad one. As Quidel notes in a press release, the businesses are "highly complementary" to one another and "provide opportunities to capture significant growth globally while enhancing cross-selling opportunities across a diversified customer and channel mix."

That said, Quidel paid a 25% premium for Ortho and funded the deal mostly through shares (only $1.75 billion will come from cash), so it's no surprise that there was a drop in the share price. Quidel is now back to trading around $130. Shares of acquiring companies typically fall in acquisitions, especially if investors don't agree with the price tag.

However, in the long term, the deal could pay off for Quidel and expand its growth prospects, which I'd argue is important, especially as COVID-19 testing volumes eventually subside. Consider just how important those tests are to Quidel's results. In the latest quarter ended Sept. 30, revenue totaled $509.7 million, and COVID-19 products generated $402.6 million of that amount. Yet, just a quarter earlier when it looked like the pandemic's end might finally be in sight, revenue totaled just $176.6 million and and sales of COVID-19 products came to only $83.4 million.

Quidel is a riskier investment to hold than Pfizer, but it too can be useful as a hedge against omicron. In November, the company shared its analysis indicating "a high likelihood that the omicron variant is detectable by our immunoassays." So as case numbers rise and demand for testing soars, Quidel's stock could have a strong year in 2022. However, investors should brace for inevitable volatility.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns and recommends Quidel. The Motley Fool has a disclosure policy.

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