While the COVID-19 pandemic has been a painful reality for people around the globe, there is a silver lining: An entirely new category of stocks have been born, many of which have seen tremendous growth throughout the year and are likely to continue doing so.
As a result of the tremendous runs in value seen in the space, a flood of investors are looking to strike it big with investments in companies working to prevent or treat the virus. But do these stocks represent a good investment opportunity, and should you consider investing in them? Let’s take a closer look.
What Are COVID-19 Stocks?
COVID-19 stocks represent companies that are working to combat the pandemic. These companies provide products and services that help prevent, detect, or treat the novel coronavirus that leads to COVID-19.
This description may include more than you think. While COVID-19 hasn’t been around for a year yet, there are already hundreds of companies in this category. These companies offer or are developing a wide range of products and services, including:
- Vaccines. There are several biotechnology companies that are currently working on the development of a vaccine for SARS-CoV-2, the coronavirus that causes COVID-19. Some of these companies are already in late-stage clinical trials, suggesting that a vaccine may become widely available by early 2021.
- Treatments. Treatments are also being developed in an attempt to assist the patients who experience moderate to severe COVID-19 symptoms. Gilead Sciences made history when its drug remdesivir proved to be effective in reducing time to recovery in COVID-19 patients. There are several other companies working to develop other, potentially more effective treatments.
- Personal Protection Equipment. When you need to go shopping or visit the doctor, you wear a facemask. You can’t get into most places without one. There are several publicly traded companies that develop face masks, surgical gowns, face shields, and other personal protective equipment designed to reduce the chances of infection by COVID-19.
- Infection Detection Equipment and Services. If you feel sick, you need to be tested. Moreover, even if you don’t feel sick, your temperature is being checked before you go into a school or doctor’s office. Thermal imaging, COVID-19 testing technology, and testing centers are all included in the COVID-19 stock category.
- Cleaning and Hygiene Supplies. You’ve been told throughout the pandemic that it’s important to clean surfaces in your home and practice personal hygiene to prevent infection by COVID-19. As a result, cleaning supplies and personal hygiene products have been flying off the shelves. The companies that provide these products aren’t just cleaning supply companies anymore, they’re COVID-19 companies too.
- E-commerce and Work-From-Home Tech. Finally, in order to prevent infection by SARS-CoV-2, many people are being told to stay home. This has led to a boom in work-from-home and shop-from-home activities. So, the companies that provide the technology and infrastructure to make this possible are benefiting greatly, turning companies like Amazon and Slack Technologies into interesting COVID-19 stocks.
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There Are Considerable Risks in the COVID-19 Space
There are hundreds of companies in the COVID-19 space. Soon, there will be thousands. And many of these companies are bandwagon companies.
The COVID-19 pandemic has been so devastating that the U.S. and other governments around the world are throwing massive amounts of money into grants to develop prevention and treatment methods. Moreover, investor interest is incredibly high as investors see an opportunity to strike it rich by funding the next big vaccine, device, or treatment option to serve the COVID-19 market.
Any time there’s this much investor interest, a market bubble forms. While some companies within the bubble are great companies with real products and services that deserve the valuations they’ve earned, others aren’t quite as savory.
Many upstart companies are looking to jump on the bandwagon of COVID-19 to get their hands on investor dollars. These companies say they’re working on a product in the COVID-19 space but have nothing tangible to offer. Unfortunately, due to the fear of missing out, investors are piling into these companies.
According to the Silicon Valley Business Journal, the issue has become such a big deal that the U.S. Securities and Exchange Commission (SEC) is beginning to crack down.
At some point, the bubble will burst, and only the companies that actually have something of value will remain. Those that are making blanket statements suggesting they’re going to get into the COVID-19 space soon will crash and take investor dollars with them. If ever there was a type of stock that requires additional due diligence before investing, COVID-19 stocks are it.
Pro tip: If you’re going to add COVID-19 stocks to your portfolio, make sure you choose the best possible companies. Stock screeners can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.
COVID-19 Stock Pros & Cons
Although it’s important to be wary of companies with nothing real to offer when investing in COVID-19 stocks, making the right moves in the space can be lucrative. As with any group of stocks, COVID-19 stocks come with their fair share of pros and cons.
COVID-19 Stock Pros
There are plenty of benefits to investing in the COVID-19 space. Some of the most compelling benefits include:
1. The Potential for Dramatic Gains
With such tremendous interest from retail investors, institutional investors, and even governments, there’s tons of money flying around in the COVID-19 space. As a result, many stocks in the space have gained in many multiples, generating enormous profits for investors.
Although some of these opportunities are already in the past, there are many ahead.
If a vaccine company were to get FDA approval for a COVID-19 vaccine, or a treatment company were to get approval for a treatment option, the stocks that represent these companies would fly. As a result, investing in these companies prior to an approval would prove to be a highly lucrative move.
2. Investing in What You Know
Unless you’ve been living under a rock, you know quite a bit about COVID-19. After all, when something changes your life to the extent that the pandemic has changed the lives of billions, it’s natural to seek information to understand what’s happening.
There’s a value in investing in what you know. That’s why some of the most profitable investors who ever lived advise that you should only invest in a category that you know intimately, and they do the same with their portfolios.
If you have personal experience with the effects of COVID-19 and have taken the time to educate yourself on the topic, you have a leg up in the market if you choose to invest in the COVID-19 sector.
3. The Feel-Good Effect
COVID-19 stocks represent companies that are working to assist consumers in the prevention of the virus or to improve the outcomes for those who have been infected. That’s impressive, and it’s as much a philanthropic effort as it is a capitalistic one.
The COVID-19 pandemic has been a painful reality for people around the world. When you invest in a COVID-19 stock, you’re investing in a company that is working to improve conditions for humanity around the globe.
While that’s a tall order, the world’s best scientists are on the job, working to fill it. Being part of that concerted effort comes with a bit of a feel-good effect, making it easier to rest your head at night.
4. COVID-19 Is Likely Here for the Long Term
One of the big arguments against COVID-19 stocks is the idea that the SARS-CoV-2 virus will be eradicated for good, and soon. As a result, most companies in the space will never have a chance to generate profits.
Although the virus won’t be so dire once there are vaccines and treatment options available, it’s likely that it will remain a long-term issue.
SARS-CoV-2 is genetically similar to other coronavirus types that are known to cause the common cold. We’ve learned quite a bit from these strains of coronaviruses. Most importantly:
- It’s Difficult to Immunize Against Coronavirus Strains. For most, the common cold is nothing more than an annoyance. For high-risk individuals, it can be deadly. If it was easy to make a vaccine to protect against the common cold and illnesses like it, there would already be at least one. Creating an effective vaccine for the masses against this type of virus is an idea that has proven elusive for years.
- Coronavirus Immunity Doesn’t Last Forever. Your body creates an immunity against the common cold when you get it. Over time, that immunity begins to wear off, making it possible to become sick from the same strain of cold virus again after a couple of years. It’s the same reason annual influenza vaccines are important. Immunity doesn’t last forever. In the case of SARS-CoV-2, history is likely to repeat itself, leading to a consistent need to vaccinate and possibly to a seasonal influenza-like annual resurgence in COVID-19.
COVID-19 is likely to be a long-term reality. Again, as the greatest scientists on Earth create vaccines and treatments, it may not be so scary in the future, but it will likely be around for good, and so will some of the lifestyle changes that you’ve experienced over the past several months. As a result, investments in the right COVID-19 stocks offer potentially lucrative long-term benefits.
COVID-19 Stock Cons
Investing in COVID-19 stocks comes with some great perks, but no rose is without its thorns. There are a few drawbacks that you have to consider before investing your first dime in the space.
1. Fraud is Rampant
When the SEC starts to take a special interest in a sector, something serious is going on. Several publicly traded companies are claiming to be doing something profitable in the COVID-19 space, but with nothing tangible to show, they are doing nothing more than misleading investors.
This is a very real risk, and getting caught up investing in one of these misleading companies can prove to be a significantly costly mistake. With so much fraud taking place in the COVID-19 space, you should only invest if you feel you have the expertise to see through the veil and get a real understanding of the intrinsic value of the companies you may want to invest in.
2. Many COVID-19 Stocks Are Highly Overvalued
Investors are excited about COVID-19 stocks. After all, a vaccine or treatment option that hits the market would generate billions of dollars in revenue. The problem is that overexcitement among investors leads to overvaluation in stocks.
This is how bubbles in the stock market are born. Unfortunately, regardless of the quality of the company you’re investing in, if the company is overvalued by the market, it will likely result in losses for you.
As a result, when investing in the COVID-19 space, it’s important that you know how to use valuation ratios to make decisions with regard to over- or undervaluation, and invest only in the stocks that are undervalued according to these key ratios.
3. Additional Research Is Required to Make Profitable Decisions
Any time you invest in a space where fraud is rampant, your job becomes more difficult. It’s never a good idea to take a management team’s word for anything. Research is important in all cases. However, when fraud is rampant as it is in the COVID-19 sector, it’s important to make sure that you go in-depth in your research before making decisions.
The bottom line is that with all of the excitement, misleading statements, and misinformation out there at the moment, you not only have to research, but verify your research. Make sure that everything you come across is public on multiple sources to verify the truth behind the statements before making any investments in the space.
Who Should Invest in COVID-19 Stocks?
There are few groups of stocks that are a strong choice for all investors. Investing simply isn’t a one-size-fits all process. When it comes to COVID-19 stocks, there are a few qualities that successful investors in the space will likely have:
- An Ability to Sift Through the Noise. There’s a lot of noise in the COVID-19 sector. Unfortunately, everyone seems to think they’re an expert, and quite a bit of misinformation about the virus and the companies working to combat it has been spread across the Web. To succeed as an investor in COVID-19 stocks, you need a keen ability to sift through that noise and find and act on the real data surrounding investing opportunities.
- An Ability to Analyze Valuation. Many stocks in the COVID-19 space are already trading at valuations that would only be justified if a vaccine or treatment is approved. There’s no room for profits in these stocks. So, an investor in the COVID-19 space should have a keen ability to properly value companies.
- A Willingness to Go Deeper Into the Data. Because fraud is a big issue in the COVID-19 space, investors need to be willing to do not only their general due diligence, but also to dig deeper and verify every bit of information they find.
- A Strong Stomach. COVID-19 is a bubbling space at the moment. That’s a major risk. As a child, you could never tell how long the soap bubble you blew would last — the one thing you did know was that it was going to pop. Stock market bubbles work the same way. At some point, the COVID-19 bubble is going to pop, and when it does, the vast majority of stocks in the sector will experience significant declines.
How Much Should You Invest in COVID-19 Stocks?
By their nature, COVID-19 stocks are risky stocks for three big reasons:
- Fraud and Misleading Statements. Any time fraud is an issue in a sector, there’s a serious risk added to investments in that sector. With fraud being such a big deal that the SEC is getting involved in general oversight, there is a serious risk involved in buying into any lesser-known company in the space.
- Everyone Claims to Be an Expert. COVID-19 is a big issue that affects everyone. As a result, the school of Google has been active, and everyone and their dog has become a self-proclaimed expert in the topic. Purposefully misleading statements and accidental misstatements lead to invalid conclusions and myths about the disease and treatments. This results in investors having a difficult time knowing the difference between what’s effective and ineffective, profitable and loss-generating, and what’s up and what’s down. When the truth is hard to verify, educated decisions are hard to make.
- Valuations Are Ridiculous. Even some of the most reputable companies in the COVID-19 space have grown to ridiculous valuations. It’s as if just saying the term COVID-19 is worth a few million bucks in the stock market. This is a bubble, and investing in a bubble is a dangerous idea.
It’s always a good idea to follow the “5% rule” when deciding upon allocation: Invest no more than 5% of your entire portfolio’s value in a single investment vehicle, and never invest more than 5% of your portfolio’s value in a group of high-risk stocks.
So, if you have $10,000 in the market right now, you should not invest more than $500 into COVID-19 stocks, or a mix of COVID-19 and other high-risk stocks, at any given time. With all the risk involved in the space, it’s not worth chancing significant losses by investing any more in these stocks.
The COVID-19 pandemic has shaken the world. It has also shaken the stock market. Unrealistic valuations are being given to companies with little more than a hope and a dream. Even companies with something of value are trading at such high levels that the market seems to be pricing them as though they’ve already made billions of dollars in the space.
Nonetheless, there are still a few gems left in terms of COVID-19 stocks. It may take a bit of extra research and a keen eye on valuation to be profitable here, but the right moves will still prove to be highly lucrative. So, if you’re going to invest in the space, make sure to do your research and then some.
And if you’re optimistic about the future and want to invest around an eventual market recovery, there are other COVID-19 recovery plays you can consider.
Do you invest in COVID-19 stocks? Which ones?
Originally posted at https://www.moneycrashers.com/coronavirus-stocks-invest/