On Sunday, the US declared the Swine Flu as a public health emergency in the US, which inevitably will leave traders and investors wondering whether there are some swine flu stocks and investment ideas that make sense now. This article is not meant to trivialize or denigrate the people impacted, but rather, simply provide some stock trading and investment ideas that make sense if in fact, the swine flu becomes pandemic and creates a true global crisis. I don’t believe we’re there at this point and don’t mean to sensationalize, but looking back at the Asian bird flu crisis, there were several investments that turned over rapid profits with the thinking that a flu pandemic was probable and investors were rewarded handsomely.
Update: Summer 2009 Swine Flu Stock Status Article
Since the emergence of vaccination for many diseases and the efforts of the CDC and other governmental organizations in preventing global pandemics, Americans and Western nations primarily, have become rather complacent when it comes to the threats of infectious disease, so much so that people now often fear the vaccine more than the disease itself, even when no evidence exists that the vaccine is actually unsafe. Therefore, at the early stages of a potential brewing pandemic, I envision there will be some level of complacency or disbelief that the swine flu could cause damage of catastrophic proportions. However, if this is the real thing, we could very well see panic and fear that puts the recent financial crisis to shame. Once a flu strain jumps species and starts mutating rapidly, we could be in for another event where over a quarter of the world’s population is wiped out like the human species has encountered before. On one hand, you have international travel and close living quarters which further propagates such a scenario, vs. a very organized, efficient and innovative medical and investigative network. The question really is, are we lucky this time again? I sure hope so. But if not, these “swine flu stocks” and “swine flu investments” could reap rewards in this Black Swan scenario.
Just Go Short – This is the most obvious and broad measure to combat a global disaster. From buying a 3X negative ETF like FAZ (Financials would likely be hit to hardest) to simply selling individual stocks or indices short, this would be a shotgun approach. I’d expect that airlines, casinos and other entertainment/travel stocks would be hit in a severe situation.
Buy Out of the Money Puts – This is the highest ROI option. If you think indices are going to fall 30% or more on this, you may want to buy a 20% down put for pennies a few months out and be rewarded with a triple digit return if markets do tank. For instance, the S&P500 ETF SPY is closed at $87 per share on Friday. You could buy Jun expiry puts at the $70 strike for under $100 each.
If shares dropped to say 60, the contracts would each be worth well over $1000 plus whatever volatility premium is remaining for a return in excess of 1000%.
While this portends a worse case scenario where it’s evident within a month that this is the real thing, it’s insurance that some investors may want to consider, especially if they have a lot to lose on their long positions and don’t want to sell. (More on Special Event-driven options strategies).
Companies that stand to benefit – Do you recall last time when the Asian bird flu was picking up and Tamiflu was flying off the shelves? Roche shares rallied and they eventually had to grant licenses to additional companies to keep up with demand I recall. It’s possible we’d see Tamiflu depleted from global stockpiles quickly in such a scenario and we may see Roche benefit again. While it’s a small drug and a rather large company, when demand spikes hundreds-fold and if they need to out-license for even a nominal royalty fee, at a minimum, the market may perceive another large runup. Additionally, there are many smaller biotechs working on flu vaccines. Whether any of these would be effective against a swine flu are yet to be determined, but you may see a quick rally in these shares. For Swine Flu Stocks, consider both Novavax (up 75% on Friday on the news, see full CEO interview and analysis of why downside risk exists after this massive runup) and Biocryst (up 40% on Friday when the news broke) which will likely continue to run up this week on the news. I will be updating on more companies and my trades, so be sure to follow my updates in real-time with RSS (What is RSS?).
Additional names garnering attention were: AVII, GNVC, DVAX, HEB, SVA.
Trading Strategies for Swine Flu Stocks: I think near term, these will continue to rally, especially if the news worsens. Longer term, as soon as there’s the faintest glimmer that the swine flu pandemic is not on its way, these sell off massively, back to their levels from last week or perhaps with a small premium remaining.
Buy Gold – Nothing strikes fear into the hearts of traders like a pandemic event. With gold already hovering above $900, an outbreak could send prices sky-high. Consider the 1x ETF GLD or the 2X ETF UGL. I’d avoid the ETN GOE as it behaves erratically.
Intrade – While they don’t have anything up just yet, they used to have a bird flu prediction event. As I had outlined here, there are opportunities to trade against world events and this will likely be up soon at Intrade with an events futures market.
Masks will also be flying off the shelves, as they are in Mexico now. If you want to stock up, now’s the time. I don’t know that there are any individual companies that stand to benefit since it’s more of a commodity item, but from a supply standpoint, something to consider.
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What are your investment ideas in the event of a swine flu becoming pandemic?
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