From the desk of Steve Strazza @Sstrazza
In this report, we cover our Coronavirus Custom Index which is comprised of stocks we believe benefit from the coronavirus as well as a playbook to profit from these strong performers.
To be clear, we didn’t find these stocks looking for coronavirus plays, we found these through our ordinary process of scanning for relative strength. We were simply looking for stocks that have been bucking the trend during the recent selloff. With that said, it was hard to ignore the results when we thought about what these companies do.
Here is our All Star Charts Coronavirus Custom Index making higher highs and higher lows recently while the broader market squanders near bear market territory.
Click on chart to enlarge view.
The divergence in performance speaks for itself. So how did we choose these names and what are they?
One way we look for strength is by measuring the resilience of a stock’s momentum. Every name in our custom index did NOT get oversold since the market peaked on February 19th and many haven’t been oversold for well over a year.
Additionally, we identify strength via performance, so many of these stocks are also trading at or near 52-week highs and have posted some of the best returns in recent weeks and months.
Read more about our process for scanning for the strongest stocks in our recent post.
With that as our backdrop here is the list of stocks in our Coronavirus Index with return and momentum data. The data in the table is as of Friday, March 6, 2020.
Click on table to enlarge view.
Whether these stocks are outperforming due to the coronavirus or not is not our concern. We don’t worry about the WHY, just the WHAT. And these are what names we want to focus on right now, regardless of the reason for their strength.
Are there other companies that you could make a better argument for benefiting from the Coronavirus economy? Definitely. And are there stocks that have exhibited even better relative strength but don’t have a direct tie to the Coronavirus? Sure. But that wasn’t the point of this exercise.
These are just some of the stocks that are doing the best right now while also having obvious virus-related tailwinds. You can decide whether or not its a coincidence that they also have a bull case based on the recent pandemic. Again, it’s not important to us, but we recognize some investors might sleep better at night owning stocks they think will benefit from the panic surrounding the Coronavirus.
Here is the list with company descriptions for those who are interested in the possible “WHY” case for the strength in these stocks.
Now here are our favorite trade setups from our Coronavirus Index.
Where better to start than Zoom Video (ZM), maybe the most widely touted “coronavirus stock” by the financial media. This name has got a lot of love lately, but based on the chart setup, we think it’s for good reason.
Zoom provides video conferencing services and has become the poster child of coronavirus plays as people are forced to have less face-to-face meetings. It has also held up as well as any stock, up 30% over the trailing month while the S&P is lower by more than 10% (as of Friday). In the chart above, notice Zoom is pressing on fresh all-time highs on both a relative and absolute basis.
This is exactly the kind of setup we want to be buying in this market. An asymmetrical reward/risk opportunity in one of the strongest outperformers.
As long as prices are above 105 we want to be long with a 1-3 month target at 144.
FROM THIS POINT ON, THIS POST WAS ORIGINALLY PUBLISHED FOR PREMIUM MEMBERS ONLY, BUT HAS SINCE THEN BEEN OPENED UP FOR EDUCATIONAL PURPOSES.
We already recommended five of the strongest names from our Coronavirus Index in non-related posts last week. Read about the setups in Dollar General (DG), Clorox (CLX), and Steris (STE) here, Netflix (NFLX) here, and Alibaba (BABA) here. You can also view a summary of them all on our trade ideas page.
Here we have Gilead Sciences (GILD) which has been rallying recently due to their late-stage trial efforts to bring a coronavirus vaccine to market.
Notice how we have not been in oversold territory dating back over 300 trading days to December of 2018. During this time price has built a healthy rounding bottom pattern which it recently exploded higher from. Momentum even printed an overbought reading two weeks ago while the market was correcting.
Since Gilead has moved pretty far pretty fast on their recent news, up about 20% from when the market peaked on February 19th, we want to give it some time to consolidate as price approaches potential resistance near prior highs and its 38% Fibonacci retracement zone.
After some backing and filling, we wouldn’t be surprised to see prices make a sustained breakout above this level. We want to be buying strength above 80 with a price target just above 92 if/when this happens.
Like Gilead, rival biotech Regeneron (REGN) is working on a coronavirus drug which has driven a fast move higher in its stock price recently as well. In fact, Regeneron has been the best performer in the S&P since the market peaked.
Momentum recently spiked into overbought territory as prices resolved higher from a multi-year continuation pattern within the context of a long-term uptrend. We want to allow for some backing and filling towards 440 but as long as prices are above former channel resistance we can be long with a 3-6 month target at all-time highs near 600.
Quest Diagnostics (DGX) is another obvious beneficiary from the continued spread of the virus as they are the market leader in medical diagnostics and lab testing. The stock has been trading in a wide range between 79 and 113 for the last 3.5 years.
Prices surged to a fresh all-time high last week but have since retraced slightly below former resistance and recent highs near 113.
Same story as the rest, this has been a strong stock for some time now and is pressing on new highs in the face of the recent selloff. But price still needs to prove that we can trust this move so we only want to own it if we get a sustained breakout back above the 113 level. This would give us a 1-3 month target towards 134 or 3-6 month target at 147.
Laboratory Corp of America (LH) is also a medical diagnostics and testing company so it’s no surprise that their chart setup is quite similar to the one in Quest, above.
One major difference is it is much messier as price has flirted with a breakout above 2018’s highs twice now before whipsawing lower amid the recent volatility in the broader market. This could either be a failed breakout or just some shakeout moves before buyers finally absorb all the supply at the 190 level.
For this reason, like Quest, we only want to own Laboratory Corp on strength. If and when prices make a sustained move above 190 we can be long with a 3-6 month price target at 250.
Still on the theme of Healthcare, next is a Real Estate company, Healthcare Realty Trust (HR), which is a Medical REIT that specializes in owning and operating outpatient facilities.
Healthcare Realty closed at its highest level since 2007 last week. The stock has stayed out of oversold territory for almost a year now as prices have rallied back towards the upper bounds of their multi-year range near 36. We had a quick whipsaw lower after prices first broke above this level in late February, but it was followed by a fast move back to fresh highs.
For now, this breakout is intact and we can own Healthcare Realty against 36 with a 3-6 month price target back towards its all-time highs at 44.
As long as prices are above former resistance and potential support at the 38% retracement near 57, we want to own Activision with a 1-3 month target at 67.50 or longer-term target at 2018’s all-time high near 84.
The next chart is of Teladoc Health (TDOC) which is a provider of remote healthcare services. The stock is up 70% over the trailing 3-months so it clearly has more than just coronavirus-related tailwinds at its back.
While it would be healthy to digest recent gains and consolidate around the Fibonacci extension at 120, as long as we’re above this level we want to be long with a 3-6 month target at 188.
Last but not least is Domino’s Pizza (DPZ) another obvious stay-at-home stock. This has been one of the strongest performers in the market for over a decade now as prices have increased over 100-fold from below $3 in 2008.
The stock printed a breakaway gap out of a 20-month base on strong earnings the day after the market topped. While it has since given back the majority of those gains, momentum spiked to an extreme overbought reading and has managed to stay well above 50 during the pullback. We can buy weakness in this name towards 300 with a target back towards the recent high near 384.
Between this report and several posts from last week, we’ve outlined a handful of trade setups currently offering asymmetric reward/risk opportunities in some of the strongest names in the market.
Whether you want to own them due to their coronavirus application, strong technical setup, or both, doesn’t matter. What matters is these stocks have been bucking the trend during the recent downturn, and that tells us they are likely to continue to be the leaders once the market regains its footing.
Hope you enjoyed this report. Please let us know if you have any questions!