7 reasons why investors should keep piling into the red-hot reopening trade, according to Fundstrat

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  • A record surge in daily COVID-19 cases over the past week has put into question the sustainability of the so-called reopening trade as concerns grow over the potential for more lockdowns this winter.
  • There is potential for daily virus cases to surge past 200,000 this week, according to Fundstrat’s Tom Lee, but nonetheless, investors should remain invested in the “epicenter stocks.”
  • Positive results from COVID-19 vaccine candidates developed by Pfizer and Moderna helped spark a rally in the reopening trade, and improving COVID-19 treatments could keep the rally going, Lee said in a note on Monday.
  • Detailed below are reasons why investors should continue to buy the reopening trade, according to Fundstrat.
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Positive COVID-19 vaccine data from Pfizer and Moderna have helped spark a surging rally in the reopening trade, or buying stocks that benefit the most from the physical reopening of the economy: restaurants, hotels, airlines etc.

But with a resurgence in COVID-19, some investors are casting doubt on whether or not the rally in these so-called “epicenter” stocks is sustainable, Tom Lee of Fundstrat said in a note on Monday.

The doubt is valid, as there is no sign yet of a peak in US daily cases, and the rollout of COVID-19 vaccines to the general population is still months away.

“In fact, it looks like the US will exceed 200,000 daily cases sometime this week,” Lee said.

But rather than back away from the reopening trade in the face of surging virus cases, Lee is doubling-down.

Outlined below are the seven reasons why Lee remains committed to the reopening trade, according to the note.

1. “Vaccine momentum dramatically strengthening = bring us closer to post-pandemic world,” Lee said.

Over the past week, efficacy data of more 90% for Pfizer’s COVID-19 vaccine candidate, and 94.5% for Moderna’s candidate. Both firms are seeking emergency use authorization from the FDA

2. “Treatments are seeing vast improvements, including Olumiant, reducing the risk of “full lockdowns,” Lee said.

Lee highlighted that a Swedish study found the drug Olumiant, developed to treat rheumatoid arthritis, “was shown to reduce COVID-19 mortality by 71%,” Lee said, adding that the drug was found to protect patient lungs from the devastating respiratory effects of the virus. The drug was also shown to be effective for elderly patients, Lee said.

“By protecting the vulnerable, this reduces the need for pursuing lockdowns,” according to Lee.

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3. “US cases are surging but the related coefficient for hospitalizations and deaths is lower,” Lee said.

While the current wave of the virus is still raging on, deaths and hospitalizations have not yet surged above the peaks seen during the first wave earlier this year like daily cases have. While daily deaths have been on the rise in recent weeks, they are 75% below the peak reached during the first wave, according to the note.

4. “US governors are pursuing targeted lockdowns, not ‘full stay at home’ order = good news,” Lee said.

With lower levels of mortality from COVID-19, the need for cities and states to pursue full lockdowns “is much lower,” according to Lee. One recent example is the urging of New York City mayor Bill DeBlasio to reconsider his plan to close all schools by New York governor Andrew Cuomo.

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5. “Europe COVID-19 cases are rolling over,” according to Lee.

6. “$4.5 trillion of cash on the sidelines is finally moving into stocks,” Lee highlighted.

7. “China and Asia are back to normal,” Lee noted. 

“We believe the risk/reward is still favorable for epicenter stocks,” Lee said, despite the surge in daily cases of COVID-19. And with investor consensus still skeptical of the reopening trade, “the positioning might also be favorable,” Lee said.

“We see earnings upside the strongest in these [reopening] names in 2021, given the operating leverage (cost cutting) plus potential topline tailwinds,” Lee said.

Those tailwinds include the potential for more global economic stimulus and a global recovery in demand, Lee concluded.

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