Many of the hottest stocks on the market at the moment are those of companies that are developing potential vaccines or treatments for COVID-19, as companies that are well suited to the transformed economic conditions of the coronavirus pandemic . Modern (NASDAQ: MRNA) is one example, with its stock up to 256% up. It is one of the few vaccine developers that has advanced its coronavirus vaccine candidate into clinical phase 3 phases.
But investors should be aware that in the long run certain high-flying stocks may not be able to maintain their attractive positions and current competitive advantages. Indeed, there is a real risk that Moderna and other products that have boosted COVID-19 this year may eventually crash. Here are a few reasons why investors need to be careful when buying shares of companies that are doing well in the midst of the pandemic.
1. Higher demand may not be sustainable if the pandemic subsides
COVID-19 infections are unlikely to continue to increase at today’s rapid rate, with the US over 5 million cases in about five months. And once these difficult conditions disappear and there is more normalcy in everyone’s life, it will change the outlook for stocks that are flourishing in the coronavirus pandemic. Certain companies may no longer be able to deliver significant growth.
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In Moderna’s case, the demand for a vaccine, which is overwhelming by 2020, may eventually disappear. It is possible that the coronavirus season will reappear, and humans may need annual vaccinations, in which case Moderna could benefit from recurring demand for its vaccine. However, Moderna’s vaccine candidate is still far from a sure thing, adding another layer of risk to any investors thinking about buying stock today. The final rule is that investors should be prepared in case the demand for any particular vaccine does not become permanent, whether it is due to the delay of coronavirus cases or competition from other vaccines. There need to be other perspectives in the underlying business for investors to fall back on a fax machine.
The Massachusetts-based company posted its second-quarter results on Aug. 5, where it sold $ 66.4 million – 407% higher than the previous year’s period. Modern credits the increase in the development of its vaccine candidate and an increase in revenue for collaboration, encouraged by a strong quarter of AstraZeneca.
The company’s $ 37.9 million subsidy revenue – $ 37 million of which is from the Biomedical Advanced Research and Development Authority (BARDA) – makes up the largest share (57%) of Moderna’s topline. That is a significant piece of the company’s revenue that depends on one-time financing.
Another company that is doing well during the pandemic is Clorox, (NYSE: CLX) with its stock up to and including year 46% up. The California-based consumer goods company is known for its cleaning products, which are in high demand because people and businesses are waiting to be rehabilitated to minimize the spread of COVID-19.
Clorox released its fourth-quarter results on August 3, and sales of $ 1.98 billion for the period were an impressive 22%. For the full fiscal year, revenues were up $ 6.7 billion by 8.2%. But the year before, sales were up just 1.5% and that was down from the 2.5% sales growth Clorox reported in the previous year.
It is likely that as the pandemic subsides and becomes less of a constant threat, Clorox will return to single-digit growth. Although there is now a strong demand for sanitation and it can remain a priority for many years, it is an added cost for companies that many will be forgetting in the hope of strengthening their bottom lines, which COVID-19 dives.
Ratings are high
Even if you think companies like Moderna and Clorox are still good investments, the problem is that buying them at their current prices can be unappealing because of their inflated valuations. Considering their respective sale numbers, investors today pay far more for these shares than they did for the pandemic:
MRNA PS Ratio data by YCharts
In general, investors pay a premium for a stock because they expect the company to do even better in the future, and those expectations bake into the current price of the stock. But in a few years, or how long it takes to worry about dimming the pandemic, the outlook may be less rosy. And that could leave stocks like Clorox and Moderna vulnerable to corrections and their share prices could even crash if their sales fail to support their increased valuation.
What should investors do?
This does not mean that investors should not invest in these stocks, but that extra attention needs to be paid to their valuations and the strength of their underlying companies. Shares of both Moderna and Clorox have risen sharply this year and sound better than the S&P 500:
MRNA data by YCharts
Investors need to assess if these and other companies are making strong investments outside of COVID-19, and how they view it in a scenario where life is moving towards normal. Although new COVID-19 cases could continue to pop up for many years, investors should not assume that the pandemic is a long-term situation and should avoid investing based on that assumption. Making decisions about investments based on that kind of uncertainty can lead to problems. It could cause you to hold a stock that is too expensive and where the company’s outlook for the future might not be nearly as optimistic as it once was.
Therefore, it is important to look at horizons in the long run and not ignore valuations when deciding whether a stock is a good buy. While investors are currently bullish on Moderna and Clorox, these are two stocks that could crash hard if demand for their products falls as the rate of COVID-19 slows, and that’s why I’m staying away from both of them today .
