Massive disease outbreaks have changed the course of history and spawned huge Hollywood movies, but the global economy has bounced back every time.
For long-term investors, there’s no need to track the viral scenarios. All we really need to remember is that people will always get sick and medicine will always adapt to contain and treat new diseases.
It all is part of the long cycle of innovation and progress. And the next outbreak will strike somewhere else.
But in the short term, of course, that’s not really comforting. That’s why whenever people start getting sick, market reporters always ask me to weigh the market impacts.
The most recent interview was with Reuters. Click this link to watch it. Naturally, it revolved around the coronavirus epidemic in China that already has killed hundreds of people and quarantined millions.
That was Jan. 27. Since then, things have gotten worse, with the virus showing up in Europe while Delta Air Lines Inc. (NYSE:DAL) and American Airlines Group Inc. (NASDAQ:AAL) cancel all flights from China.
This is not my first outbreak. When I saw the headlines start, I knew exactly how this would play out on Wall Street.
And if history plays out like it has every time before, the “plague stocks” rallying now will ultimately perform well for shareholders… but only if you take a long view and maintain diversified exposure.
Think Like a Venture Capitalist
I’ve talked a lot about the venture capital mindset lately as my new IPO service ramps up. In essence, the big fortunes that built Silicon Valley incubated for years.
Even the smartest venture capitalists know that 30-40 percent of their best ideas will ultimately fail. That’s all right. The rest will do well enough for the portfolio as a whole to double in six years.
This math revolves around statistics derived from tracking multiple positions across long periods. Otherwise, you’re really just betting on horses. The more you know about horses, the more you’ll win, but you’ll still lose a lot of the time.
Every viral outbreak is an emergent situation. We don’t know today who will cure the disease and a lot of people have strong incentives to try. One horse will cross the finish line first.
Financial reporters will ask me to name the horses and pick a favorite. As it turns out, the correct answer is simply to split your stake across all the contenders. That way, you’ll always pick the winner.
Think back to the Ebola outbreak of 2014. A handful of stocks soared once investors realized how important a cure would be.
Sarepta Therapeutics Inc. (NASDAQ:SRPT) has been a long-term winner, soaring a healthy 530 percent since the first U.S. Ebola cases were reported. Ironically, the company’s experimental cure went nowhere, forcing other programs to fill the gap.
Drug developers with a more intense focus on Ebola did much, much worse. After surging in 2014, Arbutus Biopharma Corp. (NASDAQ:ABUS), BioCryst Pharmaceuticals Inc. (NASDAQ:BCRX) and NewLink Genetics Corp. (NASDAQ:NLNK) collectively have handed investors who bought the rally an 87 percent loss.
People talked a lot about Versar Inc. back in 2014 as well. That stock no longer exists.
If you were looking to invest in an Ebola cure six years ago, you had an 80 percent chance of picking the wrong horse. But SRPT did well enough to cushion its pain, turning a staggering loss into a 26 percent net win.
And smart investors work even harder to balance their risk while remaining open to the rewards. None of those five companies ever cured Ebola. If you can’t cure a disease, you need to find other ways to protect people.
Both Alpha Pro Tech Ltd. (NYSE:APT) and Lakeland Industries Inc. (NASDAQ:LAKE) also soared in that outbreak. They’re soaring now.
They make hazmat suits and other decontamination equipment. No matter what the disease is, they’re essential.
Investors who added these two stocks to an Ebola portfolio ended up earning 48 percent in six years. Not bad at all… until you see the S&P 500 with its 64 percent return over the same period.
Betting on disaster only pays off big when the rest of the world suffers. I’d rather incorporate disaster stocks into a wider strategy, using them as a hedge while enjoying the good times while they last.
That’s why I stay focused on the long view. My GameChangers stocks were in place before the outbreak and will pay out after Wall Street forgets about the coronavirus, just like it forgot about Ebola, Zika or SARS.
My goal there isn’t to find the best disaster stock and squeeze a few extra points out of an otherwise miserable outcome. I’m here to find winners.
Cannabis Corner: Cash is King
This week was another rough one for Big Cannabis, with the core group of eight stocks I track down 6 percent in the aggregate.
Until today, only two were able to defy the red tide and continue their recent rebound. One was the biggest and best capitalized, Canopy Growth Corp. (NYSE:CGC).
But as big stocks sold off today, CGC lost its grip on a win. It will come back. After all, there’s $2.7 billion on the balance sheet.
Factor out debt and shareholders are still looking at $5 billion of book value. With $400 million a year coming in and a steep sales growth curve, it justifies its $10 billion market capitalization nicely.
All we need there is for CGC to reach a size where sales generate profit instead of empty cash flow. Maybe that’s this quarter. Results come out in two weeks.
Every smaller cannabis producer needs to reckon with similar math. Most are still a long way from breaking even. The clock is ticking every day.
And until they cross the finish line, investors will remain hesitant. Why buy a cannabis copycat unless you can see the leader doing well?
In the meantime, these companies will trade on the balance sheet. That’s why only battered CannTrust Holdings Inc. (NYSE:CTST) ended this week in positive territory.
The company confirms that it has $175 million in cash. It is only a $200 million stock right now. The gap is narrow enough that, even in a catastrophe, management should be able to find a way to close it and make shareholders whole.
While the upside for CTST may no longer be stratospheric, the risk seems to be off the table now. When a stock hits bottom, it may not bounce much immediately… but you’re unlikely to suffer much more.
Join Me for the Orlando MoneyShow, February 6-8, 2020, at the Omni Orlando Resort at ChampionsGate. I will be speaking Friday, Feb. 7, 3:00 p.m. about The Stealth Value Investor: Ten Amazing Dividend Yield Plays Flying Under the Radar. On Saturday, Feb. 8, I will talk at 5:15 p.m. about Identifying the Real Future GameChanger Stocks: Ten Companies Positioned to Double – Even if the Bears Take Over Wall Street. Other investment experts who will be speaking include retirement and estate planning specialist Bob Carlson, income and options expert Bryan Perry and world-traveling, free-market economist Mark Skousen, who leads the Forecasts & Strategies newsletter. Register by clicking here or call 1-800-970-4355 and mention my priority code of 049252.
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