Recovery stocks are the obvious play from here.

by OccamsRPG

Hi, fairly seasoned investor here. I’ve done fairly well this year (up roughly 55% YTD and actively managing my portfolio daily). Honestly, I’m a bit bewildered by all the love for tech that still exists here. To me, it’s pretty obvious that from here on out, the next 40-50% gains will come from the recovery stocks, not tech.

What do I mean by recovery stocks? Retail, commercial real estate, airlines, casinos, cruise lines, financials.

Why? Allow me to borrow a couple minutes of your time.

Vaccine vaccine vaccine. There is a widespread belief, which I agree with, that we will not have an approved vaccine available for the public to use until early next year. However, that is a dumb reason to not buy recovery stocks. The question you should be asking is: will we know that one of the many vaccines that are out there is effective and safe by the end of this year? Once we have a vaccine candidate that we know is effective and is safe, then the game is over. It does not matter if that vaccine won’t be approved for a few weeks after, or won’t be available for widespread use for a few months. The market looks forward. Once it becomes clear that a vaccine is ready and is coming sometime within the next 6 months, the recovery stocks will boom.

So, when will we know? Pfizer has said that they should know by the end of October whether a vaccine is effective, and will release some data around then. If their Phase 3 data is positive, then I expect a huge rally in the recovery stocks. I expect their phase 3 data to be positive, given the positive phase 1/2 data, the cloaked positive comments in the press by Pfizer execs, and my belief in mRNA’s potential.

Ok well even if we get a vaccine approved we don’t know if people will even take it, right?. Of course they will. Sure, there will likely be only a small cohort of brave souls initially who take it, but once they take it and find it effective and low on side effects, they will tell their circle of friends/family, some of whom will then take it themselves, and then tell their circle, etc. etc. People want someone else to be one of the first to take it, but like with many things, once they hear it recommended from their friends who took it, they will themselves take it. Also, let’s not forget that we won’t need 100% vaccination rate for things to get back to mostly normal, and a lot of activities that were previously restricted (like international travel) will likely be available again only to vaccinated folks, which will further boost vaccination rates and create a self-reinforcing cycle.

Ok but things will never fully return back to the way things were, right? Probably not 100%, but I think 80%, yes, and much more quickly than you think. There is so much fearful talk of remote work being the way forward, and that no one wants offices anymore, and why would you ever travel for business again. I think this is all blown WAY out of proportion. For God’s sakes guys, this is the way we’ve been doing things for many decades. People’s habits won’t just change on a dime like that because of a 9-12 month situation that is temporary. People will still want to see each other face to face, people will still go to offices, etc. I mean, I work remotely for my job, and it sucks. Meetings are confusing, I find myself procrastinating and not being nearly as efficient/productive as I was when I was in an office, team cohesion is down. Many employers do not like remote work because productivity is decreased significantly, and it’s employers who will set the policy. Now, sure, maybe we have more remote work than we did before. Maybe it’s an option for some people, maybe you work 1-2 days remotely per week or something, fine. But I don’t think this justifies a 300-600% run up in some of these work from home stocks, and I expect to see those absolutely crater once we have a vaccine.

Ok, but the stock prices of these recovery stocks won’t return to normal for quite a while, right? Not only will they, but they’ll surpass their previous pre-covid levels. Why? The Fed, and short covering. The Fed has inflated the prices of all the ‘hot’ stocks. PTON, ZM, FSLY, etc. all have had huge run ups because tech was hot, and people had a lot of money to invest. Once the recovery stocks are hot, they will be inflated too. The Fed has committed to keeping rates low for at least another couple years (due to wanting inflation pegged at 2%), so rates will be low even after we have a vaccine. Short interest in some of the recovery names are also quite high, so short covering will drive these stocks even higher than you’d expect.

Ok, but, a second wave is coming, right? Probably, but a second wave at this point should mean nothing to recovery stocks. It’s all about the vaccine. If a vaccine is shown to be effective in November, but we get hit with a second wave in December, who cares? Yes maybe these companies will have 1-2 months of pain, but again, the market looks way forward, and once you have a vaccine, the light at the end of the tunnel will be blaring, and you’ll ignore the bumps on the way.

Ok, so why not just buy the recovery stocks when/if they come out with positive data? Yeah, you could I guess, if you’re a very risk averse investor or not totally convinced. However, I would not be surprised to see some of the more hard hit recovery stocks up by 15-20% after positive vaccine data (for example, ALK was ~$65 pre-covid, but is now at ~$38. If a vaccine is shown to be effective tomorrow let’s say, I don’t think it’d be unreasonable to see that stock shoot up to $44 pre-market). Even then I’d still expect more upside though, so I’d be a buyer there. However, I’d personally prefer to cash in on those 15-20% gains as well as the future upside, which is why I’m a buyer here.

Ok, well, what are the risks? The risks are mainly around a covid vaccine not being effective or being unsafe. If that happens, then recovery stocks will take a serious beating. You also may see some short term pain if covid cases jump before vaccine data is released, as some folks/algos in the market take that as meaning ‘sell recovery, buy tech’. Also, make sure you buy companies with very strong balance sheets, as if there are any unexpected bumps in the road with a vaccine, you don’t want to be stuck with a company you’re worried about going bankrupt.

I would really really appreciate feedback on this. I’m investing a lot of money in these stocks, and am by no means blind to the risks. I would really love hearing from everyone here about the things I missed or am not considering. If you have something I’m missing, and can potentially save me many many thousands of dollars, please please take a few minutes and just share that comment here. Thanks for your time reading this!

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.