Your investment portfolio is the sailboat to take you on your journey to and through retirement. The boat is made of investments, and RAM employees are the crew. The economy is the wind, and the chop on the water is volatility.
Normally we would write about some standard adjustments the crew is making in anticipation of changing winds and chop. But SARS-CoV-2, the name of the virus that causes the disease Covid-19, has created unprecedented wind patterns, unprecedented chop, and the potential for more unprecedented developments. Clues are all around that unprecedented conditions may be on the way, or may be around the point, or may be forming right over our heads, or all the above.
The economic and company specific topics and data that we follow are the obvious ones that we have consistently written about. So, this essay is a brief description of the SARS-CoV-2 topics that we are evaluating. What follows is our general sense of cumulative information that we have encountered, so we are not going to have citations for each sentence, and we welcome future discussion. The podcast, This Week in Virology (TWiV), has served as a launchpad for many topics that we have studied. We apologize if we have geeked-out a little bit on the amateur biology and virology below.
Antibody tests- Our attentiveness to the antibody test data has waned over the last month. For many people, the body’s first line of defense (T cells) seems to be sufficient in battling this infection. Perhaps up to three quarters of people under the age of sixty who test positive for SARS-CoV-2 remain asymptomatic throughout the process of clearing the virus. When the T cells need reinforcement, the antibody IgM is produced within a week, and antibody IgG is produced within two weeks. IgG is the antibody that remembers the specific virus. If you know a person who felt certain they had Covid-19, yet they do not have antibodies, strong T cells may be why. T cells are also capable of remembering a specific virus. We are actively on the lookout for data about the role T cells are playing.
We expect the ability of a person to fight SARS-CoV-2 to improve with successive exposures, even without antibodies. So, we are watching for any information about reinfections.
Load and Duration of Exposure- The extent to which a person suffers is heavily influenced by preexisting conditions, the amount of virus that enters the body, and the amount of time over which that amount of virus entered the body. Small exposures spread out across time can go a long way to creating effective immunity. So, we are watching geographies where the virus has been, yet there has been less strain on the local healthcare systems.
Mutation and Vaccination- Coronaviruses normally have low mutation rates compared to other RNA viruses, and so far, this is the case with SARS-CoV-2. Low mutation rates increase the chance of having a vaccine that works on all variations. The best way to reduce the chances of a mutation is for everyone to avoid catching it, and not transmit it if infected. We do not want to give the virus opportunities to “learn new tricks.”
The vaccine development efforts are quite heavily focused on presenting the spike proteins on the outside of the SARS-CoV-2 to a person’s immune system. This is the most innocuous section of the virus to introduce to an immune system, compared to more common vaccination processes which introduces inactivated virus or small amounts of active virus. It seems to us that science is putting most of its eggs in the spike protein basket. Given the demand for quick turnaround and mass production, this strategy makes the most sense.
Bottom Line- If SARS-CoV-2 is like past viruses and most of the population gets small exposures that are spread across time, T cells and antibodies could become adept at fighting the virus such that there may not even be a need for a vaccine. However, a successful vaccine would allow the world economy to open-up fully much sooner and stronger.
The Equity Market- Companies that provide products and services where demand has been accelerated by the pandemic, have seen their stocks soar. Companies that have had revenues swoon, with no real path to a re-attaining pre-pandemic levels, have seen their stocks fall. The disparity between growth stocks and value stocks was sometimes several standard deviations wide before the pandemic and the gap has only widened further during the pandemic.
For example, Zoom Video Communications (ticker: ZM) started the year at $69/share. Shelter-in-place orders created a great deal of demand for video conferencing, and ZM zoomed to $250/share. The market capitalization of ZM is now $70 billion on trailing twelve-month revenue of approximately $828 million. This reeks of the dot com bubble, especially when considering that multiple tech titans have been actively developing competing products that will be free to most users.
Currently, strong winds are pushing many of the growth stock sail boats too far out to sea while many of the value stocks are being blown toward the rocky cliffs. Sail boats are not suitable for either the deep waters or the rocky shallows where the waves crash. For the meantime, we are maintaining positions in growth-oriented stocks with an eye toward reducing the positions. However, the uncertainty around the operations of many cheap stocks prevents us from allocating money to them currently, even though the growth/value disparity is extremely wide. That is to say, we are sticking with quality earnings companies at somewhat extended valuations rather than investing in lower quality companies or companies more threatened by Covid-19, at this time.
Please touch base with us if you would like to discuss the pandemic or the markets, or to evaluative your financial plan.
Redmond Asset Management, LLC JULY 2020
The opinions contained in the preceding commentary reflect those of Redmond Asset Management, LLC. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Redmond Asset Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.
Redmond Asset Management, LLC (RAM) is an independent, SEC registered investment management firm located in Richmond, VA and is not affiliated with any parent organization. RAM was founded in 2005 and registered with the SEC on 22 Dec 2005. The company offers investment management services for equity, balanced and fixed income portfolios to corporate, institutional, and individual investors.