“Don’t play the Hero” as the virus spreads

US stocks ended yesterday’s session with about 1% down for the day, but the indices were still well above the bottom for the session, and today they are even up after the support test.

Sales may be widespread across the market, but AbbVie (ABBV) is reversing the downward trend in the markets and holding back profits because of a series of positive news. First, the company announced it was entering into an agreement with Zenpep as part of the approval process for the acquisition of Allergan (AGN). This news is generally expected, but it still raises the chances that one of Abbvie / Allergan’s key drugs will not be excluded from the portfolio. As SVB Leerink analysts pointed out, “the news should further increase investor confidence that Skyrizi will not be part of the US corporate exclusion plan.”

In addition, Reuters reports that China has suggested that people take AbbVie’s Aluvia drug to treat coronavirus symptoms. According to an article here, Abbvie is donating a drug worth more than $ 1 million to help fight the virus.

AbbVie’s recent weakness has created a great opportunity. We found this particularly true with stock returns over 5.5% amid very low interest rates. We are repeating our position now.

We also see strength in Clorox (CLX). Investors are following the stock with the idea that sales of the popular disinfectant wipes business will increase, because that’s what consumers are looking for whenever there is some kind of pathogen-related illness.

It makes sense and history is on the Clorox side here, commenting on a conference call for the fiscal second quarter of 2010 that demand has increased during the H1N1 flu pandemic.

These are two stocks that may see an increase in prices due to the virus in China, but without saying it is clear that, in general, any large company with a presence in China will have the opposite effect. Before proceeding with them, we first want to talk about some of the stocks we like despite the uncertainty.

First is Costco, which is being monitored for the fact that all cylinders are running at full speed in this company and we expect this to continue despite the virus in China, an area where the company has one location.

Elsewhere, Bristol-Myers (BMY) remains under observation, as is CVS Health. Both stocks are trading with a very good foundation and expectations for strong EPS in 2020.

Among all the promotions mentioned above, we know that these are conservative names in the basic health services / consumer categories. But we think the risks to future earnings are far less obvious to any company than some other groups who may notice that the numbers are shrinking and leading to a large deficit due to the loss of business activity in China. This means that we will not buy in bulk and prefer to stay small here.

We see no reason to be heroes and rush into the market again. Friday’s trading session plus Monday may be ugly, but the S&P 500 is still only about 2.5% of its highest. Therefore, if we wanted to buy, we would choose things on a smaller scale.

Two other companies we are targeting are Starbucks (SBUX) and Apple (AAPL). These two are targeted by the coronavirus due to their large exposure in China, but this is not the only thing they have in common. The other is that both will report their winnings at the end of the session today and the timing couldn’t be more important. Winnings are always important, but the final numbers, even better than expected, may not be enough to become a great catalyst for raising the indexes. It will be very important what they say from both companies, what the effect of the virus is on their sales and what they expect for the new quarter.

Source: The Street / Action Alert PLUS

 Trader Aleksandar Kumanov

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