Jan 21 - 2020 Coronavirus In China Feared To Be Virulent, This Could Be A SARS Redux, What To Do
Like the SARS epidemic I'm expecting much ado about relatively little.
I don't want to sound cold, any loss of life is sad. That said, the biggest affect will be the fear rather than the reality.
Already, hotel and gambling stocks are hurting. I select a few names that could be of interest.
In an unrelated item, I believe that Slack is a buy off of the Microsoft ad campaign for their competing Teams product. If MSFT needs to have an ad campaign against Slack that says something.
Any Loss of Life is Sad and I Don’t Want to Seem Cold
First, I want to say that I'm sorry for the suffering and the loss of life. I don’t want to seem cold blooded. My focus is on the stock market and what this means for trading and investments. So my focus is on how stocks might react and relate to the news flow coming out of China right now. This situation is very similar to the SARS “epidemic” of the early 2000s. I put an epidemic in quotations because that crisis did not end up matching the hype. The fear on the ground in China was palpable even 1000s of miles from here in the US.
The fact is what makes the past talk of an epidemic was that SARS also was a Coronavirus. It ended up being not all that contagious and was mostly an animal to a human vector of transmission. Early word is that this is exhibiting human-to-human infection. Obviously this is less than ideal. On top of that, this morning the fatalities were two with 300 infected, and now I hear it's six fatalities with one case already found in the US. I expect that the CDC will quickly get a handle on inbound flights from the Wuhan region. I also understand that there's work already underway for a vaccine, and Regeneron (REGN) is said to be working on a treatment as well.
If We Do See This as Another SARS, Here's What Will Happen
While SARS was a big nothing, the impact was a fairly big one in such a short time. The impact was in the s of billions in China in early 2000s dollars. Very likely the impact in China might be well larger. However, just like SARS, the hype will have much more of an impact than the actual disease. Already there's talk of canceling the Chinese New Year, which is like the US government canceling Christmas. Clearly, if that happens, it will affect the Chinese economy in the short term, but it will not have any kind of long-term effect
This Is Already Affecting Stocks.
Wynn Resorts (WYNN), Las Vegas Sands (LVS), Melco Resorts and Entertainment (MLCO), and Marriott (MAR) - all these companies suggest their second-biggest market is China. I believe the Macau-related gambling stocks are most vulnerable if it reaches the level of hysteria of the SARS epidemic. It looks like Lukin Coffee (LK), a darling of Wall Street as the Starbucks (SBUX) of China, also is getting sold down. Again, the timing of this new illness could not be worse because of the lunar New Year. Macau junkets will drop precipitously. I’m not sure why LK is selling off, and while it could be strongly affected, it should bounce back faster than WYNN, LVS or MLCO.
In a seemingly unrelated, yet related development, NovoVax (NVAX) is rocketing higher after its presentation at the JPM conference last week. It has developed a flu vaccine that ignited a lot of optimism. A killer H1N1 bird flu out of Asia is the perennial nightmare scenario which this Corona Virus is certainly not. I wonder if the two occurrences have been adumbrated and boosting NVAX stock right now. Again this “Wuhan Fever” Virus is a Coronavirus, not the flu. I expect a whole chain of stocks to readjust based on how far the fear rises. As odd as this may sound, I was thinking of featuring this name over the weekend purely on the interesting flu vaccine they are working on. Now, I think it would be less than helpful to buy into the name as it is up 40%. Please put NVAX on your watch list if names like this interest you. It's on my list.
I Would Not Commit Risk Capital to Pertinent Trades To China Just Yet If I Were You
To me, this seems like a developing buying opportunity once the nightmare scenario has been trotted out by every “health crises” talking head. The best names in my mind would be the hotel names just mentioned. Yet if you are comfortable trading Chinese stocks there are many ways to play this.
It’s hard to make a case that the Chinese Internet names will ultimately be affected, but they are down today and I expect them to fall further if panic sets in. So KWEB the Chinese internet ETF might be interesting for a trade, it also follows that ASHR the Chinese “A” shares stocks might be interesting as well. When should you take the long side? Again, when all you see are headlines about the “Killer Coronavirus” if you were around for the SARS “epidemic” you know the script. Or this whole thing fizzles out, and it’s not worth the speculation. Watch and observe for now, it could turn out the be the play of the week, or a bust. Again, I apologize for how this sounds but it all depends on how high that mortality goes, the higher it is, naturally, the greater the fear and hype will rise. If you regularly trade KWEB and ASHR then you might get lucky in the next few days. If you’ve never traded Chinese Internet names now is not the time to try, they have a rhythm all their own.
Let’s Change The Subject
Microsoft (MSFT) is kicking off an ad campaign for their Teams software. The ads will premier at the NFL Playoffs. Native Americans judged how important their particular tribe is by how large and fearsome their enemies were. I believe I read this in the great Novel “Centennial” By James A. Michener. If that's untrue, take it up with his ghost. That said, my point is that if MSFT feels that it must launch a huge campaign to promote their Teams corporate software they must really feel threatened by Slack (NYSE:WORK). Therefore you should buy Slack in the face of this marketing onslaught. In addition, it causes me to believe the WORK CEO when he says MSFT is juicing their user numbers. He asserted that Teams gets automatically logged in when any corporate user uses their Office 360, and then they go ahead and uses the Slack application. MSFT then uses that inflated number to claim that Teams is doing better than Slack. I think not.
I Did Not Get Executed on My Netflix (NFLX) Puts
I decided that I would not risk more than 2% of the stock price, and in fact, I initially put in a bid that was 1.5%, but I raised it to 2%. I was not executed, and that is that. I may try to express my short view of NFLX tomorrow if I see a good entry point. I have learned over time to decide how much I want to risk from the outset and not chase if you don’t get that level. I may try to find another way to express my short-term bearishness, in other ways, like the Nasdaq 100. If I have disappointed you, my dear reader, for not doing what I dared to, I would like to remind you that I said from the outset that my limit was risking was 1% of the share price, and I pushed it to 2%. I felt a strange pressure to do what I say, even though the situation did not match my criteria. It looks like NFLX is only down a few percentage points. I suspect that NFLX is vulnerable to further downside movement if the overall market creates downward pressure.
My Trades: I closed out most of my long trades. I'm still long BA, I'm long VIX. Of course, I have my long-term investments. I also have long-term trades that I call speculations which are doing nicely, like Diamond Eagle Acquisition Corp (DEAC) which I'm long in the Warrants.
Of all the China Related names, I think Lukin Coffee (LK) could be very interesting since it really has nothing to do with travel to Wuhan, and yet could be sold off very sharply if this illness gets the hype that I think it could. I would be very interested in LK at the to level. The other interesting name to me is Wynn Resorts, one of the most volatile names in the S&P 500. So taking a level in the low 120s is not as implausible as it sounds since WYNN is trading in the 140s right now. Again, these China-related names are only relevant if the fear and hype live up to the level of the SARS “epidemic.” Let’s hope that we find other even better opportunities to exploit than any human suffering even if it's more sound than fury.
Disclosure: I am/we are long DEAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long DEAC via Warrants, I am also long BA and VIX CALL options, and I am short BYND via PUT options