3 Stocks Testing The Coronavirus

·5-min read

The novel coronavirus continues to spread at an exponential rate with no clear end in sight. The market has recovered marginally from its initial crash, but there may still be pain to come.

As I mentioned in my previous article, How To Play The W-Shaped Recovery, we are likely just experiencing a bear rally, which I explain is common during market downturns.

The $2 trillion fiscal stimulus package combined with the Feds unprecedentedly no cap QE program is the catalyst for our current rally. Still, the timelines for business to resume as usual remain unrealistic. President Trump initially said that the US economy would be fully up and running by Easter (April 12th). Now he is saying June, which seems equally unrealistic.

In the article I referenced above, I stated that life would not resume normality until a vaccine is universally available, which I stand by, but I believe that once testing is widely accessible to the public, we will be able to take steps towards getting people back to work. 

If we can test the working population, we will be able to bring the healthy American’s back to work and isolate those with the virus.

Below are a few companies that are involved in coronavirus testing.

3 Stocks Testing The Coronavirus

Roche Holdings (RHHBY)

Roche is a Swiss healthcare company with international operations in both pharmaceuticals and diagnostics. This gives the company a double-edged sword during the pandemic with its high demand testing kits and potential pharmaceutical treatments.

Roche Diagnostics is working tirelessly at their manufacturing plants around the world to get its coronavirus testing kits out to the public. The company announced that it would be shipping 400,000 coronavirus testing kits to the US per week.

Roche is also testing a drug called Actemra that was initially used for rheumatoid-arthritis but is now being repurposed to treat severe pneumonia. The FDA just approved phase 3 clinical trials for the drug. Pneumonia is one of the complicating diseases associated with this pandemic. The FDA approved phase 3 clinical trials for the drug with testing expected to start in April.

I see RHHBY as a very investable stock due to its healthy balance sheet which exhibits $12 billion in cash and equivalence combined with its debt-to-capital of 29%. The stock has illustrated decades of stable growth and a robust growing dividend, currently yielding 1.85%.

RHHBY has been able to weather the coronavirus crisis quite well with its shares effectively flat for 2020. The stock is currently trading 20% off its target price of $48 per share.

LabCorp (LH)

LabCorp is the world’s leading healthcare diagnostics company and just celebrated its 50th-anniversary last year. 

Today LH is focusing its laboratory efforts on coronavirus tests, analyzing 30,000+ tests per day. This is partially offsetting its massive declines in patient testing for other purposes, which gives it a bit of a hedge. The $2 trillion aid bill (CARES Act) that was passed last will provide LabCorp with further financial stability.

LH shares have taken a sizable hit from the pandemic, but I believe that its 34% plunge since mid-February is unjustified. This stock is trading at a considerable discount with its forward P/E sitting at its lowest level in over 2 decades. 

LabCorp and its coronavirus testing is a necessity to the US today and will recieve whatever capital it requires to continue operating. I think it is likely that its coronavirus testing will continue to scale with time.

Quest Diagnostics (DGX)

Quest Diagnostics is LabCorp’s biggest competitor, and together they form a duopoly in the diagnostics space. These two stocks are highly correlated, but DGX shareholders didn’t get hit as hard as LH’s, and I attribute this to its 2.7% dividend (LH provides shareholders with no dividend). DGX’s rich yield is attractive to investors, especially when fixed-income yields fall to all-time lows.

Quest’s efforts in testing match that of LabCorp with 30k+ tests daily. Like LabCorp, coronavirus testing should partially offset its broader patient drop-off. DGX will also be provided with a similar capital boost from the recently passed fiscal stimulus bill.

LH vs. DGX

When comparing these two stocks, although I like the 2.7% dividend that DGX is offering, I believe that LH has a greater potential upside. Analysts are projecting stronger topline growth and larger margin expansion over the next few years from LH compared to DGX.

Take Away

There is no question that coronavirus testing is crucial to the control of this pandemic. The three stocks I discussed are vital to limiting the novel virus’s exposure and could have a place in your portfolio’s healthcare allocation. Remember, the markets still have more room to fall, so I would not recommend any significant positions on the stocks I discussed. These are equities that are worth adding to your watchlist.

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