In this week’s update, CIO Tom Weary, CFA®️, discusses the news of Pfizer’s coronavirus (COVID-19) vaccine showing 90% effectiveness and the stock market’s enthusiastic but short-lived reaction. He also goes over the latest numbers on the pandemic and shares earnings from RFA Core Portfolio holdings Air Products & Chemicals and EnerSys as well as Defensive Portfolio holdings Cisco Systems and The Walt Disney Company.
Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update. The week began with exciting news in the fight against the coronavirus sending stocks to new highs. We also heard from a few of our companies as earnings season winds down. Let’s start by looking closer at the latest coronavirus news.
On Monday Pfizer announced preliminary results from their coronavirus vaccine trial showing 90% effectiveness in preventing COVID-19. This breakthrough gives hope that the pandemic can be brought under control and the economy can return to normal. Investors rushed to sell the Work-From-Home stocks that had been the year’s big winners and rotate into beaten down cyclical stocks. Monday was the biggest winning day for Value stocks over Growth stocks in decades. But then reality started to sink in. The Pfizer vaccine requires two doses given 21 days apart and must be kept at 80 degrees below zero Celsius during shipment. This is a logistical nightmare and it will be many months before there is enough vaccine to go around. There is a light at the end of the tunnel, but it is still a very long, dark tunnel. New cases of COVID-19 are exploding exponentially as we head into the holiday season, breaching 100,000 daily only last week before surpassing 150,000 today. Hospitalizations have reached a new record at well over 60,000 Americans, putting a huge strain on the healthcare system. Of great concern is where the pandemic is hitting hardest, which you can see by this map is focused on the most rural parts of the country. Hospitals are few and far between and can be quickly overwhelmed. And as this last chart shows, the U.S. has one of the highest mortality rates from COVID-19. Given no alternatives, states are being forced to re-impose restrictions in order to slow the spread of the virus. That and no signs from Congress of any further fiscal stimulus weighed heavily on the market after the initial excitement over the news from Pfizer. This is looking to be a long haul to daylight.
Early in the week we heard from industrial gas producer Air Products and Chemicals, a holding in the Core Portfolio, with earnings of $2.19 per share missing analysts’ estimates by 2 cents on revenues of $2.3 billion which beat expectations by $50 million. The CEO said that the pandemic knocked 15 to 20 cents off earnings as industrial gas volumes dropped 3% while costs increased. Enersys, another Core Portfolio holding, reported earnings of $1.00 per share, beating estimates by a penny, on revenues of $708 million, which dropped 7% from last year and missed estimates by $14 million. We expect this leading maker of industrial batteries to thrive as 5G rolls out across the country with millions of mini-cell towers each requiring battery backup. After the market close on Thursday, we heard from two holdings in the Defensive Portfolio. Cisco Systems beat on both the top and bottom lines with earnings of 76 cents per share versus expectations for 70 cents on revenue of $11.9 billion which was down 9% from last year. Investors were cheered by the CEO’s outlook for business stabilizing as he projected next quarter’s revenue to be flat to down 2% versus analysts’ expectations for a 3% drop. And the Walt Disney Company reported their first annual loss in more than 40 years as the pandemic wracked up costs of $7.4 billion, almost all of it in the theme parks division. However, results were better than analysts had feared. While the film division was also challenged, investors were thrilled to see Disney+, the new streaming service, surge to nearly 74 million subscribers. It has been a heck of a first year for CEO Bob Chapek.
So, what does it all mean? Economic progress depends upon making progress against the pandemic. Hope came in the form of Pfizer’s announcement Monday that their trial vaccine is surprisingly effective. The reality is that we are a long way from it being distributed widely enough that the economy can return to normal. In the meantime, the pandemic is spreading exponentially, hitting new records of infection and hospitalization, requiring many states to re-impose restrictions that we had hoped to avoid. Your companies are rising to the challenge and finding ways to adapt. So, please relax, have a great weekend watching The Masters golf tournament and join us again next week for the RFA Weekly Market Update.
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