Many investors are tempted to buy "virus stocks" such as Zoom, Clorox and Teladoc, which have been boosted by the coronavirus lockdown. Here's why they shouldn't.
While the Dow is down about 20% year-to-date, the so-called “virus stocks” have soared.
“Virus stocks” are companies that profit from the COVID-19 pandemic, like Zoom (NASDAQ:ZM), Teladoc (NYSE:TDOC) and Clorox (NYSE:CLX). Shares of Zoom and Teladoc have soared about 100% and 85%, respectively, year-to-date, while Clorox has gained more than 20%.
When the pandemic is over, these companies will probably not look as attractive.
In an interview with CNBC, short seller and founder of Kynikos Associates Jim Chanos warned investors against piling into “virus stocks” temporarily boosted by the coronavirus lockdown:
A lot of these companies are really not structurally growth stocks that are trading at 30, 40, 50 times earnings because they are going to do well in the first and second quarters of 2020.
Internet usage has increased as people stay at home and practice social distancing. This allows companies such as Teladoc and Zoom to serve the public with their remote connection tools.
Teladoc Health, a healthcare technology provider that connects physicians with patients remotely, saw a substantial increase in daily visits in the United States as the coronavirus transformed into a global pandemic.
We cannot calculate a P/E for Teladoc as the company is incurring losses and probably won’t make profits until a couple of years.
Telemedicine is an emerging industry, and it’s too early to know if this trend will last post-pandemic. There are chances that interest will decline once people can see their doctor in person again.
Zoom Video Communications is a video conferencing service provider. Many schools use Zoom to organize online courses. Zoom has a very high valuation that isn’t warranted.
The stock has a P/E ratio in the thousands since its IPO in early 2019. Its trailing P/E is currently 1.26k. Its forward P/E is 263.16, which is much lower, but that’s because its future earnings will decrease. Earnings are expected to grow 200% in the current quarter, but they will only rise by 25% in the next.
The five-year expected PEG (price/earnings to growth) ratio is 7.86, which means the stock is way too expensive relative to its future growth. A stock is cheap if its PEG is under 1.
When the lockdown is over, people will probably rely less on video conference, so Zoom will likely lose subscribers. Plus, the Zoom app has security and privacy issues that might prompt users to migrate to other video conference services.
Several companies that supply necessities have seen their sales increase as consumers stay at home and stock up on essential products.
With most of its profits coming from cleaning products, The Clorox Company has seen its products fly from shelves as individuals and businesses seek to sterilize their spaces.
Clorox’s P/E ratio of 29.01 is close to its ten-year peak. Its five-year PEG is also very high at 6.3. Earnings are expected to grow at an annualized rate of only 3.73% in the next five years. So if you buy this “virus stock” now, you’re paying a high price for very little growth.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice by CCN.com.
Last modified: September 23, 2020 1:49 PM