Click HERE to access the FSInsight COVID-19 Daily Chartbook.
STRATEGY: Market takes “baby steps” toward epicenter, “dictionary” stocks still solid
This headline (one of many) was a major wake up call to financial markets. A reminder that a binary event exists, to the extent that scientists find a cure or vaccine for COVID-19.
Source: NY Times
The reaction in equities today was violent. The S&P 500 managed to surge to all-time highs and we saw the earliest signs of a rotation out of the “work from home” with the NASDAQ 100 (QQQ) down 2%. The big winners were “epicenter” stocks.
Epicenter stocks and violence of action…
Every time I think about epicenter stocks, the scene from the HBO series “Generation Kill” comes to mind (based upon Evan Wright’s experience embedded during Operation Iraqi Freedom, the book which is even better). Lt Col Stephen Ferrando, aka “Godfather,” quotes General Mattis about the violence of action. (General Mattis doctrine here)
– once investors are convinced a roadmap exists for a non-pandemic world, we expected a violent rotation into epicenter stocks
– today, in our view, was a “baby step” in that direction
Source: HBO
10%-ish rally in epicenter stocks is only “baby steps”
There have been many fits and starts for this epicenter rally, so there was naturally mixed reception, by our clients, for this rally today. Foremost, I want to emphasize that the future is uncertain, and COVID-19 is even more unpredictable. Thus, the timing for any sustained move in epicenter stocks, aka cyclicals, is highly uncertain. And as the chart below shows, today’s rally barely closes any relative performance gap YTD between FANG and epicenter stocks (using NYFANG+ and S&P 500 High Beta index as proxies).
– YTD relative performance differential >7,000bp
– today’s rally was 1,000bp relative performance
– thus, 1/7 is a baby step
But thinking about the roadmap into mid-2021, doesn’t it look to be more favorable for epicenter stocks?
But consider two timeframes, the next 8 weeks and the period into mid-2021. We list some factors, which in our opinion, are important drivers for equities. As you can see below:
– into YE –> cyclical tailwinds + Santa Claus rally
– into mid-2021 –> COVID-19 pandemic potentially peaking + economy surging = cyclical rally
Basically, whether looking into YE or into mid-2021, there are tailwinds for cyclical stocks, including the potential for earnings revisions.
Source: Fundstrat
2021 could see 7,000bp of relative outperformance of “epicenter” –> Let’s not forget about the operating leverage = EPS upside…
One central view we have, is that the probabilities are high that COVID-19 diminishes in 2021. That is, COVID-19 is less intense due to:
– vaccine
– cure/therapeutic
– herd immunity
– World comes to accept COVID-19 (not great, but possible)
Thus, risks of lockdowns diminish and consumers begin to resume a semblance of a normal life. And in this view, those epicenter companies, which slashed costs to the bone, will see tremendous operating leverage. Think about it:
– these epicenter companies can achieve new highs in profits, with revs 10%-20% below prior highs
– this happened in 2008
– this will play out in a bigger way in 2021, because the pandemic forced companies to re-engineer costs to survive
Take a look below, we think epicenter stocks could re-capture a big chunk of the 2020 relative underperformance over the course of 2021. This is 7,000bp, or 70% of relative performance. Think about that:
– If S&P 500 is up 10% in 2021 (possible)
– Epicenter stocks will be up 80%
This is obviously not a forecast, nor a guarantee, but it shows you the margin of safety in epicenter stocks.
Keep the “dictionary” stocks since money is coming from the sidelines…
The epicenter stocks are 27% of the S&P 500 market cap, so a rotation from Growth into these stocks is so mismatched, we could see a monstrous rally. But that is not what we see playing out. Instead, we see the buyers of the epicenter as coming from the $4.5T of cash on the sidelines.
We still see generational growth from many of these megacap growth stocks. After all, in this pandemic, many have become “dictionary” words and this arguably means they have staying power:
“Zoom”
“Netflix”
“Microsoft”
“Facebook”
“Peloton”
“Amazon”
“Google”
“Snap”
“Slack”
You get the picture. These have become central to our lives and will continue to be useful even after the pandemic ends. If a company is not part of your “dictionary,” perhaps the staying power might be different.
60 Trifecta Epicenter Stock ideas (*)
We are publishing our latest “epicenter” trifecta list below. This is a list of stocks where we have positive views from: Quant (tireless Ken), Rauscher (Global Strategy) and Sluymer (Technicals):
Consumer Discretionary:
BWA, GM, F, HOG, VFC, LEG, TPX, PHM, TOL, NWL, MGM, HLT, MAR, NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, GPC
Financials:
FITB, WTFC, ASB, BOH, FNB, PB, PBCT, STL, WBS, BK, SYF, BHF
Industrials:
OC, ACM, WAB, EMR, NVT, CSL, GE, MMM, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, UBER
Basic Materials:
LYB, MLM, CF, MOS, NUE, RS
Real Estate:
STOR
(*) Please note that the stocks rated OW in the list above meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
Source: Fundstrat
ADDENDUM: We are attaching the stock lists for our 3 portfolios:
We get several requests to give the updated list for our stock portfolios. We are including the links here:
– Granny Shots –> core stocks, based on 6 thematic/tactical portfolios
– Trifecta epicenter –> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Sluymer (Technicals)
– Biden vs Trump –> based on correlation to either candidate odds
Granny Shots >> Link
Trifecta Epicenter >> Link
Biden White House vs. Trump White House >> Link
POINT 1: Wow. Daily cases 116,380, +35,454 vs 7D ago
The latest COVID-19 daily cases came in at 116,380, up +35,454 vs 7D ago. Wave 3 is gaining momentum, so we are not really near a peak in daily cases
– the spread of cases across the US is widening
– the fastest spread remains in the wave 3 states, in particular, WI, IL, ID, ND, SD, UT, or WIINSU.
– but other states are seeing higher cases and dominating top 10 are essentially all previously “unscathed” states
– we all should be cognizant that cooler weather is making spread faster, perhaps due to weaker immune systems or “indoor” time
Source: COVID-19 Tracking Project and Fundstrat
7D delta continues to trend up…
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average.
– Daily cases are rising vs 7D ago,
– last week, it looked semi-parabolic
– the 7D rise in the most recent day is a big jump
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat
And among the WIINSU states, IL now is reporting the most cases daily, with >10,000 cases for 4 consecutive days.
Source: COVID-19 Tracking and Fundstrat
POINT 2: Wave 3: Gaining momentum, NY Tristate and F-CAT same case levels
We have been looking at different ways to give the best context to Wave 3. Up until now, Wave 3 for COVID-19 differs from Wave 1 and wave 2 for several reasons:
– it is spreading across states previously unscathed in wave 1 and wave 2
– it is more geographically disperse but mostly in the Mountains region
– 6 states are seeing the fastest spread, WI, IL, ID, ND, SD, UT, or WIINSU
– Unlike Wave 1 and wave 2, states caught up in wave 3 are largely laissez-faire, without any policy intervention
New:
– Daily cases per 1mm for wave 1 (NY tristate) and wave 2 (F-CAT) are identical for the first time
Wave 3: Daily cases per 1mm…
Take a look at “daily cases per 1mm” below. We have annotated the two aspects of “wave 3” that are the most notable:
– Key states, WI, IL, ID, ND, SD, UT, or WIINSU, are still seeing cases surge
– NY tristate (wave 1) and F-CAT (wave 2) see rising cases and now converge for the first time ever
– These are trends in cases that are not good
Source: COVID-19 Tracking and Fundstrat
Total hospitalizations nearing all-time highs…or ATH… this week will be new highs
Total hospitalizations are surging in the US. The level is just 1% off the all-time highs. This is essentially making new ATH. And sometime this week, we should see new all-time highs.
Source: COVID-19 Tracking and Fundstrat
The hospitalization coefficient is still ~1%…
The ratio of hospitalized patients to new cases is still running at 1% in this current wave. As shown below, this is way below the 3% seen in wave 2 and 13% in wave 1. In other words, this current wave is involving a far greater number of cases, but not high hospitalization rates:
– roughly only 1 in 100 COVID-19 infected is being hospitalized.
Source: COVID-19 Tracking Project
The incremental level of hospitalized seems to be getting flatter = good
This may be an easier way to visualize this. The slope of cases (x-axis) versus total hospitalized (y-axis) shows the relationship of hospital burden:
– the flatter the slope, the less hospital intensive
– wave 2 became very steep as cases soared?
– wave 3 slope seems to be becoming even flatter
Source: COVID-19 Tracking Project
But as this chart below highlights, the hospitalizations are spread throughout the US. Unlike Wave 1 and wave 2, where some states saw extremely high hospitalizations, this is less the case in wave 3.
– the exception is Texas, where this state has more individuals hospitalized than anywhere else.
– despite high daily cases for IL, it has fewer hospitalized than TX
Source: COVID-19 Tracking and Fundstrat
POINT 3: The “stone cold” logistics of the Pfizer vaccine is a big opportunity for logistics and storage companies…
Pfizer’s announcement of vaccine effectiveness is welcome news in the battle against COVID-19. This level of effectiveness, based upon 94 cases (aka events) is showing this vaccine is performing better than the 60%-65% level that US healthcare experts were aiming for. Thus, if this effectiveness remains this strong, it is best lead yet in the battle against COVID-19.
Source: NY Times
One of my good friends in San Francisco shared this article from Quartz.com. The article discusses the strict temperature requirements of the Pfizer vaccine. This vaccine needs to be stored at -70 degrees Celsius (-94 F) before being thawed and used.
– this has created logistical challenges regarding the distribution and storing of this vaccine
https://qz.com/1904638/covid-19-vaccine-states-are-hunting-for-medical-deep-freezers/
Pfizer, as the article below discusses, has created special containers holding 1,000-5,000 doses and can be shipped via UPS. And large storage farms will be needed to hold larger quantities. And once thawed, it must be used within 10 days.
https://qz.com/1904638/covid-19-vaccine-states-are-hunting-for-medical-deep-freezers/
Such logistical challenges is a “value-capture” opportunity for those in the logistics supply chain…
I don’t see this as long-term detrimental to the PFE vaccine. Rather, ingenuity and money will solve this problem. I see this as an opportunity for those companies that facilitate the storage and delivery of this vaccine.
– storage for 50 million to 100 million doses
– logistics to deliver these to all points within 10 days
There is a lot of value capture there. I am sure you have ideas which companies can profit from this. Please pass those thoughts along.
