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Coronavirus Pandemic: Investment Philosophy Should Continue To Play Out

Leonard Yaffe profile picture
Leonard Yaffe's Blog
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  • I turned bullish on the stock market in early April, as I maintained that economists and strategists did not correctly perceive the economic implications of the coronavirus pandemic.
  • Furthermore, the contagion and virulence of SARS-CoV-2, coupled with early relaxation of restrictions in several states, suggested that several sub-sectors would benefit from this tragic pandemic.
  • I continue to recommend several diagnostic, lab, PPE and biopharmaceutical stocks, as I maintain that a "new normal" is unlikely before 2022.

The tragic coronavirus pandemic will end up benefiting several healthcare sub-sectors. The lab companies should experience a significant business increase, driven by the two tailwinds of a resumption of doctors' office visits and the need for SARS-CoV-2 and antibody testing. Since April, I have conducted monthly surveys of physicians across several specialties in order to ascertain the level of patient visits. The ramp up has been form 15% to 80% recently, which in turn would suggest a sequential increase in traditional lab testing. Additionally, daily coronavirus testing in the US has doubled over the past six weeks, and antibody testing is growing rapidly. Furthermore, the FDA has granted emergency approval to Quest Diagnostics (DGX) pooled sample test. This enables testing of a batch sample of several individuals; a negative result  clears all people, while a positive result would require retesting of each sample. The advantages include the ability to test more people with limited supplies, reduced cost and availability to many more Americans. Similarly, the diagnostics companies will also benefit from increased ordering of lab tests. I am recommending LabCorp (LH), Opko Health (OPK), Quest Diagnostics, Thermo Fisher (TMO), Danaher (DHR), Genmark (GNMK), Fluidigm (FLDM) and Quidel (QDEL).

Regarding PPE, I have been recommending Alpha Pro Tech (APT) for several months. I expect mask demand to remain strong for at least the next year, fueled by the need to contain coronavirus spread, concerns regarding the upcoming flu season and the recognition of the importance of stockpiling. Since the end of May, several states relaxed restrictions too soon and to too great of an extent, which, when coupled with increased testing, has led to daily new cases in the US doubling in the past month. Furthermore, the R0 is above 1 in 40 states. In the past two weeks, the CDC has called on Americans to wear masks to prevent COVID-19 spread, and many states and businesses have made it a requirement. Alpha Pro Tech, as a manufacturer of N95 face masks and face shields in the United States, is ideally positioned to benefit. In 2019, the company reported revenues of $46.7 million and EPS of $0.23. For 2020, I forecast revenues to approximate $92 million and EPS to be at least $2.00. I believe that 2021 results will exceed those of 2020.

Regarding therapeutics and vaccines, the riskier aspect to forecast, I am impressed with Regeneron's (REGN) monoclonal antibody cocktail approach, and I am also positively inclined toward Eiger's (EIGR) effort with PEG-interferon lambda. As for vaccines, I am encouraged by the early results seen with Moderna (MRNA) and AstraZeneca (AZN), although I caution that first generation vaccines may confer immunity for only a limited time, thereby necessitating re-administration and periodic antibody level testing.

This is a relatively unique time in which an unfortunate healthcare event leads to the creation of a stock portfolio poised for good performance. Some of these opportunities have begun to be appreciated and a few remain virtually unrecognized. However, I maintain that measures to counteract COVID-19 will be required for longer than is generally perceived. I have outlined above the opportunities for "the gold" as well as those for the "picks and shovels".

Analyst's Disclosure: I am/we are long APT, DHR, LH, GNMK, FLDM, REGN, AZN, MRNA, TMO, QDEL.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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