COVID-19 UPDATE: Cases are rising in US and the simplest policy solution is requiring masks. Epicenter stocks --> Buy for the "skepticism" and stay for the "growth" -- 32 stocks

Daily cases are up again today in the US, with the same 4 states accounting for the bulk of cases: 

– CA  +4,084
– TX  +3,516
– FL   +3,207
– AZ  +2,519

These 4 states have known increases and sustained rises.  We do not think the states need to roll back the eased restrictions.  Foremost, because the case surge timeline fits with the nationwide protests more than it does with the easing of state restrictions.  Moreover, a simple policy response could mitigate transmission — requiring masks.  The studies below show that with as little as 60% compliance, the R0 drops below 1.0 and Asia typically sees 80% compliance with mask usage.  Several studies even suggest masks alone, without sanitizer, to achieve this (see commentary below).

And as we commented yesterday, TX and FL took some “course correction” steps yesterday, including the use of masks.  Today, California took the same step, CA Gov. Gavin Newsom issued an order that requires citizens to wear masks in public.  These are wise steps.  I know a mask is intrusive, and honestly uncomfortable on a hot day, but there is growing science showing that masks really slow the spread.   In this commentary, we highlight 5 studies which show how effective masks can be to slow COVID-19 transmission.  In one instance, an infected passenger flew from China to Toronto and did not infect a single passenger or crewmember on that flight, as he wore a mask during the trip.

The point we are making is that mitigation steps, like requiring masks can enable the safe re-opening of the US economy.  And allow more “V”s to appear throughout the economy.  It is encouraging to see more states and cities require masks and this seems to be gaining momentum.  In fact, our data science team, led by tireless Ken, will try to compile a list in a future update.

And I don’t think states are going to necessarily face a relentless surge in cases.  Arkansas is the prime example.  The state never issued shelter-at-home restrictions, so the state largely remained opened.  But the state began experiencing a surge in cases starting in mid-May (which as our clients know, we have flagged for some time). And frankly, those case rises looked parabolic (see below).

– But since 6/12, Arkansas has seen a steady decline in reported cases and hospitalizations peaked on 6/10
– Again, note how hospitalizations and cases tend to move in tandem.

So Arkansas looks like the case surge has peaked and without requiring shelter at home restrictions.  The state, however, is trying to encourage greater mask use — but it is not currently required in the state, yet.  It looks like AR Governor Asa Hutchinson is considering this, and Fayetteville City Council (city in the state) passed an ordinance requiring masks.

Source: COVID-19 Tracking Project
We still see stocks in the hands of buyers and the latest BofA Merrill Fund Manager survey supports this.  The most underowned sectors remain epicenter groups — Discretionary, Financials, Energy and Industrials.  And it is interesting to see these epicenter groups now rally on risk-on days.  By the way, epicenter is the also the “growth engine” for S&P 500 EPS in 2021, accounting for 62% of EPS growth, using consensus estimates.  These 4 groups are just 26% of market cap, but 62% of EPS growth. 

In short, “buy epicenter for the skepticism, but stay for the growth”


POINT #1: Cases rising in the US (due to protests? likely), but Arkansas cases rolling down could be a good harbinger
Total USA cases rose again today and are showing a stubborn rise in cases as the chart below highlights.  This is not due to a rise in testing and we see this less due to easing of restrictions.  The recency of the surge fits with cases rising due to the >350 nationwide protests raging for ~3 weeks now.

Source: COVID-19 Tracking Project


Looking at the daily case rise compared to the same day a week ago (7D) helps to visualize the rise in cases seen this week.  While many may see this as an indictment for easing economic restrictions, we do think a “course correction” is warranted.  And as we highlight in this commentary, it comes down to masks, which many states and cities are starting to mandate.  Moreover, hospitalization and death trends are not rising in tandem with cases, which we see as a positive.

– and as we highlighted yesterday, states like TX and FL are noting the new cases are a younger sub-30 person and in many cases, asymptomatic.

Source: COVID-19 Tracking Project


We have written extensively in the past week about the 4 states accounting for the bulk of case rises (CA, TX, FL, AZ) so we will limit our commentary today on that subject.

6 states report sizable increases
Arizona      2,519 vs 1,827 (1D) +692
California   4,084 vs 3,455         +629
Florida        3,207 vs 2,610        +597
Alabama       894 vs     400        +494
S. Carolina   992 vs     566        +426
Texas         3,516 vs 3,129         +387
Total 6 states                          +3,225

3 states reported sizable declines
Maryland           260 vs 560 (1D) -300
Washington       253 vs 373        -120
Arkansas            322 vs 415         -93
Total 3 states                               -513

POINT #2: Multiple studies show masks reduce spread, with as little as 40% of population usage

California ‘course corrects’ and orders mask usage
California is the latest state to course correct and CA Gov. Gavin Newsom issued an executive order, requiring the use of masks when interacting with other people in public.  This was previously not required in CA.  CA is not the only state not requiring masks, as this is not required in TX and other states.

https://calmatters.org/health/coronavirus/2020/06/masks-mandatory-california-newsom-governor-protests/

Under the new guidelines, the rules essentially require a mask whenever someone leaves their home, with the exception of eating or exercising with 6 feet of distance.  

https://covid19.ca.gov/masks-and-ppe/


Studies show the benefit of masks in reducing virus spread and does not require 100% compliance
We have included summaries from 5 recent studies about mask usage.  Three of them are meta-studies but all examined the usefulness of using masks.  Several were actually case studies from 2003 SARS and also recent contact traces of instances for COVID-19.

Weblinks:
https://www.medrxiv.org/content/10.1101/2020.04.13.20063529v3
https://www.medrxiv.org/content/10.1101/2020.05.09.20096644v1
https://www.medrxiv.org/content/10.1101/2020.04.03.20051649v3
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7191274/
https://www.preprints.org/manuscript/202004.0203/v1?fbclid=IwAR0h7PBSAB6ZEcr-DzBaTTIEV9kjvJiRZA7Eassb-rs75raKtOKIVKWcsFk

Wearing a mask for the infected, pretty much prevents spread… even on long flights
One of the more interesting cases studies, is the case of a man who flew an international flight from China to Toronto and then tested positive for COVID-19. But this COVID-19 infected passenger wore a mask the entire flight. And the 25 people closest to him on plane/flight attendants were tested and all were negative. In fact, nobody has been reported from that flight as getting COVID-19.

A simple cotton mask reduces 96% of viral if a COVID-19 infected coughs 8 inches away…
The meta-study (last one cited above) also referred to another study which found that a simple cotton mask blocked 96% of the viral load, or 36-fold drop) at 8 inches from cough from an infected patient.  This is incredible.  Unfortunately, that study only involved 31 patients and is considered “under-powered”

Mask compliance — if a mask is 60% efficient (not sure how that is measured), R0<1 if 60% of the population uses a mask…
The last meta-study also created an “efficiency frontier” for achieving different R0 values.   The chart is kind of confusing with:

– x-axis based on the efficiency of a mask –> a medical mask is 100%, but I guessed that a “cotton” was 60%
– y-axis is % of the population that needs to comply

The line in the “blue area” is an R0<1.0

As marked by myself, if everyone had a medical mask, then only 40% of the population needs to wear a mask to keep R0<1.0
–  If masks are only 60% efficient, the percentage of compliance only needs to be 60%

This is pretty impressive.  Basically, there is not a need for 100% compliance, 

https://www.preprints.org/manuscript/202004.0203/v1?fbclid=IwAR0h7PBSAB6ZEcr-DzBaTTIEV9kjvJiRZA7Eassb-rs75raKtOKIVKWcsFk


In Asia, mask compliance is in the 70%-range and at that level, the R0 is way below 1.0…
The studies also cited mask compliance rates in Asia, based on multiple surveys.

– Surveys during the SARS-CoV-2 in Hong Kong reported 74.5% self-reported mask wearing (going out increasing to 97.5%);

Using the same curve above, I highlighted how this affects the R0 (reproduction rate):

– at 80% compliance, a mask only needs to be 42% efficient to keep R0<1.0
– Using the same 60% assumption for a cotton mask, the R0 would be 0.5

Source: Fundstrat


So wearing masks clearly should impact the rate of spread.  Thus, if policymakers want to do a “smart” course correction, mandating mask usage is a no-brainer.


POINT #3: Epicenter sectors to drive 62% 2021 EPS growth, despite being only 26% of market cap…
Given the economic cycle likely bottomed, we have been advocating investors outright Overweight “epicenter” sectors:

– Discretionary ex-AMZN
– Financials
– Energy
– Industrials

We like Technology and the US economy will be more technology-centric post-COVID-19.  But Technology is an obvious and consensus overweight.  Favoring the epicenter is less intuitive, but we believe these sectors have the best upside.

In this section, we want to highlight these sectors also are doing much of the heavy lifting for earnings growth in both 2021 and 2022, by using Street consensus. If using Fundstrat’s macro EPS forecasts (mine, Brian Rauscher has his own estimates based on his system), the contribution from Epicenter is even larger:

                              Epicenter share of EPS growth…
                              2021                      2022
– Street estimates    62%                      35%
– Tom Lee model     63%                      60%

Street consensus sees 2021 EPS of $163, or 31% EPS growth
Using bottoms up Street consensus, we aggregated the EPS contributions into 3 categories:
– Epicenter (Energy, Financials, Industrials, Materials and Discretionary)
– Secular Growth (Technology, Healthcare and Comm Services)
– Defensives (REITS, Utes and Staples)

The chart below shows the EPS contribution by year: 2019, 2020, 2021 and 2022.  And the pie charts are the “EPS contribution” of share of the earnings increase.

– For 2021, Epicenter sectors will account for +$24 of the +$39 EPS increase, or 62%.
– this is 2X the contribution from the Secular growth sectors.

Hence, the earnings growth in 2021 is largely due to Epicenter sectors.

Source: Fundstrat and Bloomberg and Factset


My own forecast for 2021 EPS is even more aggressive as I expect 2021 EPS to be $190, compared to $163 from the Street.  But even on our more aggressive forecasts, you can see Epicenter is 63% of the EPS growth.

– for 2021, because of operating leverage, we see this EPS contribution continuing and see 60% of 2022 EPS growth coming from “Epicenter” groups

Source: Fundstrat and Bloomberg and Factset


Epicenter topline growth in 2021 is considerably higher than the 8% S&P 500 forecast
We have published the chart below previously, which shows 2021 topline growth forecasts, based on Street consensus. 

– 2021 topline growth is forecast to be led by FANG –> hence, stick with FANG
– Epicenter groups are all expected to see considerably higher topline growth than S&P 500 overall, except for Financials (6%).
– Energy is forecast to be the highest at 17%
 

Source: Fundstrat and Bloomberg and Factset 




STRATEGY: Buy for the “skepticism” and stay for the “growth” — 32 stock ideas
Over the past few weeks, when equities are risk-on (rally mode), we have seen outperformance of the epicenter sectors. This differs from the rally we saw in late-March/ early-April where secular growth (Tech, Comm Services and Healthcare) led the rallies.  Thus, if investors are risk-on, epicenters are at the center of that rally.

– But their outperformance is justified, if the US economy is bottoming
– Epicenter sectors will account for 62% of EPS growth in 2021, much greater than their current 26% market cap share of S&P 500

In the past 5 days, when markets rallied, you can see the outperformance of epicenter sectors on those days.   The last two days, including Thursday’s session, was a bit choppy, so one only saw mild outperformance of epicenter on Thursday.

Source: Bloomberg and Fundstrat


Latest BofA Merrill Fund Manager Survey shows “epicenter” is underweighted, with Energy extreme at -1.5 std deviations
The BofA Merrill Fund Manager Survey shows that epicenter sectors are still consensus underweights.  The exception is Discretionary, which has shifted to a slight OW (z-scores):

– Discretionary   +0.6 <–Overweight, actually
– Banks               -0.2
– Industrials        -0.3
– Materials         -1.2
– Energy            -1.5

The risk/reward is arguably better when the consensus is underweight a group.  If that sector is not owned, then positive news would prompt a positive change in positioning = upside

32 epicenter stock ideas meeting 3 of 3 criteria — a trifecta
We have asked our team to find the “intersect” of stock ideas within the epicenter + Technology.  We found 32 stocks within the Russell 1000 that meet 3 of 3 criteria:

– Ranked DQM quintile 1 (quant model)
– Rated OW by Brian Rauscher, Head of Global Portfolio Strategy
– Rated OW by Rob Sluymer, Head of Technical Strategy.

Discretionary: GNTX, BBY, GRMN, TPX, DHI, LEN, EBAY
Energy:          CVX, XOM, COP, PXD
Financial:       GS, MS, SBNY, SIVB
Industrials:     GD, ALK, FBHS, MAS, CMI, OSK, ITT, GWW, MSM, SNDR
Technology:   MXIM, OLED, XLNX, MSFT, AAPL
Comm Svcs:  GOOGL, Z

Source: Fundstrat, Bloomberg