UBS analyzed how 900 stocks perform on positive COVID-19 vaccine news days — and concluded that these 17 are poised to jump at least 9% on the next cycle of encouraging headlines

  • Speculation on how a COVID-19 vaccine discovery might impact markets has been plentiful, with some calling for a market surge and others arguing a vaccine is already priced into current valuations.
  • Keith Parker, the chief US equity strategist at UBS, is taking the guessing game out of how a vaccine — and news about one — will play in markets.
  • He lays out which stocks, sectors, and industries are set to benefit the most from positive vaccine news, and breaks down how much a vaccine might already be priced in to markets. 
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There has been a lot of speculation on Wall Street around what the discovery of a successful COVID-19 vaccine would mean for markets.

Some anticipate that a vaccine — arguably the biggest hurdle governments face in getting their economies back to full speed — will send equity valuations soaring. Goldman Sachs recently predicted that the S&P 500 will surge 11% on news of an effective vaccine.

And then there are those, like Solomon Tadesse at Societe Generale, who suspect that a potential vaccine's success is already priced into current valuations, and say a discovery may actually send markets spiraling if it turns out to be less effective than hoped.

UBS Chief US Equity Strategist Keith Parker, meanwhile, has tried to take some of the guessing game out of what impact a vaccine will have on the stock market. 

"We wanted to take a very systematic approach to try and answer that question," he told Business Insider in a phone interview Aug. 20.

In an Aug. 19 note, Parker analyzed to what degree the market is currently pricing in a vaccine discovery, as well as what stock sectors have benefited most from positive vaccine-related news so far. 

How much are markets already pricing in a vaccine?

Parker and his team looked at the four biggest positive vaccine news days since the beginning of May — May 18, July 14, July 15, and July 20 — and broke down the market's concurrent performance, also accounting for economic policy uncertainty.

They found that since May 1, big vaccine-related news has accounted for 6.5 percentage points, or about one-third, of the S&P 500's 19% gain. They also found that on days with significant vaccine news, the S&P 500 rose by an average of 1.6%.

Further, when considering changes in economic uncertainty levels, Parker estimates that at a top-line index level, there is anywhere between a 33-40% chance that a potential coronavirus vaccine is already fully priced in. 

See also: BANK OF AMERICA: Buy these 7 pharma stocks now as they race to develop COVID-19 treatments and vaccines

His assessment, though, is that an even smaller probability is priced in at an industry level, illustrating the upside potentially in store for investors.

About 22% of a vaccine's eventual impact is priced in for the more than two dozen industries with varying degrees of sensitivities to vaccine news. If 100% was hypothetically priced in right now, these industries would be performing at their January pre-COVID levels.  

If January levels are seen as unrealistic and are lowered by 30-40%, then he estimates that a vaccine is currently 30% priced in.

"In assessing what is priced, the level of what is the eventual 'normal' is a key assumption, such as what level of revenue Airlines will get back to, or employment for the US economy," Parker said in the note. 

"So Jan-Feb levels may need to be haircut. Still, even reducing the above [22% implied probability] by 30-40% to adjust for that still implies that a vaccine is just over 30% priced. Besides the level of normal, differentiating between a vaccine's efficacy and full distribution is also important in assessing what may be priced, because duration of COVID case waves matters," he added.

20 stocks that perform best on positive vaccine news

In addition to their broader market analysis, Parker's team also looked more granularly at how individual stocks in the S&P 900 performed on big vaccine news days.

Overall, the market performs well on vaccine news days, whether the developments are positive or negative (though more so when they are positive). But according to a UBS list of how all S&P 900 stocks have performed on the four biggest vaccine news days, below are the 20 stocks that have returned at least 9% on average.

1. Penn National Gaming, Inc. (PENN): 16.5% average return

2. Boyd Gaming Corporation (BYD): 12.9%

3. Service Properties Trust (SVC): 11.7%

4. Tenet Healthcare Corporation (THC): 11.7%

5. Park Hotels and Resorts, Inc. (PK): 11.5%

6. Dycom Industries, Inc. (DY): 10.3%

7. Halliburton Company (HAL): 10.2%

8. Six Flags Entertainment Corporation (SIX): 10.2%

9. Sabre Corp. (SABR): 10%

10. Sunrun Inc. (RUN): 10%

11. Caesars Entertainment Inc. (CZR): 9.9%

12. Noble Energy, Inc. (NBL): 9.5%

13. United Airlines Holdings Inc. (UAL): 9.3%

14. Wyndham Destinations Inc. (WYND): 9.3%

15. O-I Glass Inc. (OI): 9.3%

16. L Brands, Inc. (LB): 9.2%

17. Hanesbrands Inc. (HBI): 9%

Strongest sectors and industries on big vaccine news days

Parker also identified which sectors and industries performed best on days with a high amount of positive vaccine-related news. This is where he says investors will find the most opportunity relative to broader market indexes.

"At a market level, it would seem that more is priced in as it relates to a vaccine. On an industry level, we see less priced," Parker said in the note. "There is a big gap between the vaccine 'beta' and Baker Bloom and Davis' economic policy uncertainty index for the US (news-based), suggesting there may be considerably more upside on a relative industry basis than for the broader market."

Parker highlighted nine market sectors and industries that performed best on strong vaccine news days: airlines; hotels & leisure; autos; energy; household durables; apparel; industrials; banks; and consumer finance.

Investors looking for exposure to these sectors and industries might consider the following exchange-traded funds:

Airlines: US Global Jets ETF (JETS)

Hotels & Leisure: Vanguard Real Estate Index Fund ETF Shares (VNQ)

Autos: First Trust Nasdaq Global Auto Index Fund (CARZ)

Energy: Energy Select Sector SPDR Fund (XLE)

Household durables; Apparel; Autos; Hotels and Leisure: Consumer Discretionary Select Sector SPDR Fund (XLY) 

Industrials: Vanguard Industrials Index Fund ETF Shares (VIS)

Banks: SPDR S&P Bank ETF (KBE)

Consumer Finance: iShares US Financials ETF (IYF)

Conversely, the least-sensitive sectors have been consumer staples, biotechnology/pharmaceuticals, and telecommunications. 

More broadly, Parker's team found that small-cap stocks are two times more sensitive than large-caps when it comes to big vaccine news days. They also reported that cyclical stocks are more sensitive to vaccine news than defensives.

Internationally, the note said that European stocks have been more sensitive to vaccine news than in emerging markets and Japan.

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