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Oct 20, 2020

Rally in COVID-testing stocks is here to stay amid virus resurgence

Pandemic is driving the 'the future of healthcare delivery': CloudMD CEO

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Firms that provide COVID-19 testing capabilities have skyrocketed this year and there may be more room for their shares to rally.

A new wave of virus cases in the U.S. and Europe signal an insatiable need for more tests to diagnose the disease that currently has no known cure and a vaccine that’s only expected to be rolled out next year at the very earliest. That means companies that make and operate kits, like Quest Diagnostics Inc. and Hologic Inc., should see steady flows of income as patients line up to get tested, money managers and Wall Street analysts say.

As the industry soars near record levels -- up 68 per cent from a March bottom -- it’s still cheaper relative to the broader S&P 500 Index than it’s been in recent years. That means a trend of promising earnings could provide a boost this year and well into 2022.

“There’s a very positive trend out there for investors because COVID is going to be here for a while -- there is no quick fix,” BNP Paribas Asset Management portfolio manager Christian Fay said by telephone.

The iShares U.S. Medical Devices ETF, known by its ticker IHI, peeled off a record Monday as testmakers and lab companies like Abbott Laboratories and Thermo Fisher Scientific Inc. were hit by a broader market decline. Despite the recent surge, some on Wall Street think investors still aren’t giving these firms proper credit for the billions of dollars in expected sales.

Investors are “clearly discounting the durability of the revenue stream” from COVID-19 tests, according to Needham & Co. analyst Stephen Unger. He sees the testing opportunity providing a boost into at least 2022.

“Current levels don’t fully represent the recurring nature of tests,” he said in an interview. He also believes these tests will have “extraordinary” returns on investments and high margins.

Earnings Boost

The upcoming earnings season could provide a further boost for the industry when Abbott, maker of seven COVID-19 tests in the U.S., and Thermo Fisher kick off quarterly results before the market opens on Oct. 21.

For life sciences companies like Hologic, Quidel Corp., and Abbott, COVID-19 testing is “obviously the cherry on top” after record runs, said Fay, whose BNP Paribas Funds Health Care Innovators fund holds all three stocks. He’s optimistic on the outlook for the testing space given expectations for people to get a “flu, COVID, and RSV test on a quick turnaround will lead to more people getting tested more often.”

While vaccine developers like Moderna Inc., Pfizer Inc. and its partner BioNTech SE, and AstraZeneca have dominated headlines and seen the largest flows of trading over recent months, some investors are preferring to hedge vaccine bets with investments in the diagnostics sector.

“I would play out both ends -- diagnostics and vaccines -- because the ability to test to help people get back to normalcy will be key between now and a rolled-out vaccine,” said Amy Kong, chief investment officer of Barrett Asset Management LLC.