Move over Tesla, Netflix and Facebook. If you want to bet on the arrival of a safe and effective vaccine, look at food and beverage stocks, or even tobacco.
This industry group, consisting of U.S. companies such as Boston Beer Inc., Simply Good Foods Co. and Philip Morris International Inc., might not look like the most exciting bet on the end of the pandemic when life returns to normal.
But the stocks have shown a particularly strong positive correlation with rising vaccine probabilities, according to Goldman Sachs. They stand out with other so-called value stocks that are relatively cheap and unpopular today.
“As expected data releases from vaccine trials near, the impact of a potential vaccine on equities is increasingly a major question from investors,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said in a note.
One popular view among money managers is that growth stocks, which are producing strong growth, have the most to gain from a return to a more normalized world with packed hotels, busy offices and crowded airports.
But trading patterns in the run-up toward a vaccine suggest that value stocks, which have lower growth and tend to be ignored by investors, could perform better.
Mr. Kostin pointed out that there was a surge in vaccine optimism between Aug. 22 and Sept. 8, when the probability of a widely distributed vaccine by the first quarter of 2021 increased by 30 percentage points, according to data from consultancy Good Judgment Inc. During this period, the Russell 1000 Value Index outperformed the Russell 1000 Growth Index by a substantial three percentage points.
“For investors, a vaccine means better economic growth, and with that comes the prospect of higher earnings, rising inflation, and a higher and steeper yield curve. Many of today’s value stocks have faced particularly acute challenges from the coronavirus and will experience the sharpest rebounds in earnings expectations once investors have confidence in the path to normalization,” Mr. Kostin said.
Besides food, beverages and tobacco, some of the other potential outperformers include insurance, health care equipment, energy, banks, utilities and telecom – where it is easy to find cheap Canadian equivalents with big dividends.
Tim McElvaine, president of McElvaine Investment Management, a value-focused investing firm based in Victoria, highlighted two Canadian stocks that he expects will perform well as the pandemic recedes.
Calgary-based Tourmaline Oil Corp. is a natural gas producer that has been making small acquisitions this year and appears set on further expansion to take advantage of low asset prices. With the arrival of a vaccine and a better global economy, demand for natural gas should pick up at a time when supplies are constrained. Though the stock price is well above its March lows, it’s still far below highs in previous years.
Knight Therapeutics Inc., the Montreal-based pharmaceutical firm, recently completed its acquisition of Brazil’s Biotoscana Investments SA – but COVID-19 stands as a potential obstacle to integration. The stock is down 22 per cent year-to-date.
“So in an environment where COVID is less of a threat, I think that would be helpful to their business,” Mr. McElvaine said in a phone interview. (His firm owns positions in both Knight and Tourmaline.)
The problem with any value investing strategy, unfortunately, is that value stocks have been lagging the performance of growth stocks for years, frustrating investors who have turned to cheap stocks.
But as Mr. Kostin pointed out, the valuation spread between value and growth stocks, based on expected profits, is now the widest since the dot-com era 20 years ago. Growth stocks now trade at a 192-per-cent valuation premium compared with a long-term average of 100 per cent, offering an opportunity.
The gap, Mr. Kostin said, “represents the potential energy for value stocks to outperform with the right catalyst that generates a rotation.” The big hope: An effective vaccine rollout is that catalyst.
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David Berman