If my crystal ball had been working back in January, I would have been able to tell you to buy “virus stocks.”
By “virus stocks,” I mean companies that saw their share prices surge as the COVID-19 pandemic escalated… rare businesses that actually benefited from the pandemic.
Both Zoom Video Communications (Nasdaq: ZM) and Teladoc Health (NYSE: TDOC) are on the good side of the stay-at-home orders that most Americans are facing. There aren’t many businesses that can say that.
Not surprisingly, the 2020 stock charts of both companies reflect this…
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Zoom Video’s stock is up over 80% this year. Zoom provides a remote conferencing service that combines video conferencing, online meetings, chat and mobile collaboration for users.
In other words, it lets people do their jobs from home. In recent weeks, Zoom has played a big role in helping companies operate while employees can’t get to the office.
Going into 2020, the previous monthly high number for people using Zoom was 10 million…
In March, that number skyrocketed to 200 million!
Teladoc’s stock is up almost 70% this year.
Teladoc provides virtual healthcare services that enable patients to consult health providers over the phone or through video chat.
Obviously, nobody wants to go to the doctor’s office for minor concerns in the middle of a pandemic… nor do the health authorities want you to.
Teladoc last provided an update on business in mid-March, at which time the company had seen a 50% increase in patient visits over the past week. Given how the pandemic has escalated since then, I have no doubt demand has only increased.
Better Late Than Never?
Had I known back in January that a pandemic was about to break out and that stay-at-home orders would be issued across the world, would I have wanted to own shares of Zoom Video and Teladoc?
You bet I would have!
Had I known what was going to happen, it would have been no stretch to conclude that so many people staying home would drive the share prices of these companies higher.
But no crystal ball in January could foresee the unprecedented impact COVID-19 would have on the entire world. I would have never believed that by the end of March, billions of people globally would be self-isolating.
Looking forward, though, I don’t need a crystal ball to know that now is definitely not the time to be buying shares of either Zoom Video or Teladoc.
Why?
Two reasons…
- The big surge in demand for the services of each these companies is not permanent. People are going to go back to work, and people will resume going to the doctor.
The quarantine in Wuhan, China, lasted less than three months. Our stay-at-home order in the United States isn’t likely to last much longer.
When the pandemic subsides (and it will), the surge in demand that each of these companies has had in recent weeks is going to drop quickly. There is no question about that.
When that happens, interest in owning shares of these companies is going to drop as well.
- The value proposition offered by shares of both of these companies has now changed dramatically because of the surge in their share prices. Zoom Video’s shares are now 80% more expensive than they were two months ago, and Teladoc shares are up 70%.
At the current share price, the stock market values the Zoom Video business as being worth a whopping $35 billion. That is a steep price for a company that posted all of $21 million in earnings last year.
That means that Zoom Video is trading at 1,667 times earnings. Even from a price-to-sales perspective, the company trades at 55 times sales… and those are gaudy valuation metrics.
Teladoc shares are also very pricey.
These stocks have surged on short-term thinking, not long-term fundamentals. I’m not saying that they aren’t good companies, but I am saying that they aren’t good stocks to buy at their current prices.
My Advice Instead: Capitalize on Quality Being on Sale
Investors who are focused on companies that are direct beneficiaries of stay-at-home orders are missing the gift that the market has presented.
That gift is the chance to buy shares in some of the great American businesses that are now trading for two-thirds of the cost (or less) of their prices from just a couple of months ago.
These are the businesses that are going to grow earnings, cash flow and dividends for decades to come.
Play the long game. Looking for short-term wins by following the crowd has always been a fool’s errand in the stock market. Short-term investors chasing stocks that are already hot almost always get burned.
The market is a game, and it’s rigged in the favor of those of us who take a long-term view.
Take advantage of this opportunity to buy quality on sale instead.
