If there were a COVID-19 vaccine tomorrow, what stocks would you buy?
Just for grins, let’s say that, through herd immunity or a vaccine, COVID-19 disappeared off the face of the earth tomorrow.
Life was normal again. And there was no more social distancing or store closures.
What stocks would come out ahead in the post-COVID world?
I know there are some major caveats. We don’t know how effective a vaccine will be. And people would have to actually get the shot. Recent polls suggest about a third to a half of Americans wouldn’t get vaccinated, or at least not immediately.
But let’s play pretend.
What Sectors Benefit Most From a COVID-19 Vaccine
The simple answer would be to rotate from growth stocks (think tech) to more cyclical value stocks (transportation, banks, energy, industrials, etc.) That’s the standard play following a major recession.
But there are a few problems with that argument this time around.
Not All Travel Is Created Equal
To start, travel might not make as strong of a comeback as some expect.
Yes, there is a lot of pent-up demand for leisure travel. But vacationers tend to be penny pinchers who shop around for the best deal possible.
It’s the business travelers who really pay the bills. And business travel could take years to return to pre-COVID levels.
I have no doubt that major conventions and conferences will make a comeback, and business travelers will still be willing to board flights for their most important clients.
But now that we’ve established that Zoom meetings and teleconferences work, a lot of marginal conferences and in-person meetings aren’t going to happen. That means a long, rough road for the airlines and business-oriented hotels.
Stocks focused on tourism are another story, though. Disney was already hitting it out of the park due to the success of its Disney+ streaming service. When there’s a COVID-19 vaccine, Disney’s parks are back at capacity and its movies are back in theaters … look out.
Financials and Energy: Pick and Choose
Banks will be slower out of the gate this time around because, with the fed funds rate back at zero, lending isn’t as profitable.
Even Warren Buffett has lost patience with the banking sector, as he reduced or eliminated every banking stock in his portfolio with the exception of Bank of America (NYSE: BAC).
At the consumer level, COVID-19 accelerated the move away from cash. And that’s not likely to change. I haven’t carried cash in 20 years, and I’m not starting now.
Fintech and electronic payments companies like PayPal (Nasdaq: PYPL) should have continued success when life returns to normal.
Energy is so battered at this point that it should do at least marginally well over the next few years.
But we still have the issue of chronic oversupply. America’s frackers were a little too good at their jobs and managed to flood the world with cheap oil. That’s not going away anytime soon.
The midstream sector — oil and gas pipelines — looks interesting, however. Pipeline stocks as a group are trading at prices from a decade ago, and sport some of the highest yields in the market. Sure, there is political risk. But probably not enough to justify the 10% yields now on offer.
The Other Side of the Argument
Perhaps the most contrarian bet is that sector rotation never quite goes into full swing, and the growth names just keep sucking in more capital.
I am now used to Amazon (Nasdaq: AMZN) boxes and groceries magically appearing on my doorstep. Brick-and-mortar stores have lost their appeal. My wife still enjoys shopping in person, so I know this isn’t the case for everyone.
But I don’t see Amazon ceding market share. Do you?
Virus eradication isn’t the only key to picking market winners. We also have a presidential election in a few months and a wobbly economy to put back together.
But once the world returns to normal, the same familiar names may still lead the pack.