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.