Throughout history, widescale developments have created dramatic changes across the economy. During these periods, including the Covid-19 pandemic, innovative businesses have thrived by offering new products or services while other businesses have floundered. As the disparity in business results among companies expands during periods of dramatic change, so too does the opportunity set for investors.
Health Care Sector Illustrates Impacts of Change
The novel coronavirus pandemic has driven substantial divergence between innovative companies and companies that have lost market share because of failing to address demands created by the spread of the virus. Intense examples of change exist across industries but are particularly noteworthy in the Health Care sector. Examples include the following:
- Many hospitals delayed performing elective procedures to reserve resources for treating swelling numbers of Covid-19 patients while individuals delayed visiting health care providers as part of social distancing. This has resulted in pent up demand for devices that would be used in completing the delayed treatments.
- Telemedicine grew dramatically as patients sought medical advice while isolating in the safety of their homes.
- The record speed at which Covid-19 vaccines have been developed has validated mRNA genetic sciences, which could drive increased funding of the technology.
- The scope of the pandemic and its devastating impact on society may result in increased U.S. funding for medical research, which could be a tailwind for companies that provide life sciences equipment and cloud-based systems for tracking and analyzing the results of clinical trials and other research.
We believe many of these trends and their accompanying disruption will continue even after the pandemic ends as individuals have become accustomed to the convenience of telemedicine while the health care community is looking toward mRNA to develop a wide range of new types of medical treatments, and the increased need for research into viruses has been underscored by Covid-19.
How Can You Pursue Opportunities Created by Change?
Skilled investors who take both long and short positions and focus on change dynamics have a larger pool of opportunities than long only investors because they can establish long positions in leading companies while shorting the victims of change.
As a highly innovative company, Quidel Corp. provides medical diagnostic solutions and testing products. Early in the pandemic, it benefited from increased demand for its testing services that were used to rule out influenza and other non-Covid-19 causes of patients’ symptoms. More significantly, the company aggressively developed Covid-19 diagnostic products—it received FDA approval for six Covid-19 tests across multiple diagnostic technologies in 2020. The accelerating demand for Covid-19 testing resulted in Quidel’s revenues tripling last year to $1.6 billion, up from $535 million in 2019.
On the other hand, Omega Healthcare Investors is an example of a company that suffered from the pandemic and we believe it is a short position opportunity. Omega is a real estate investment trust that leases facilities to nursing homes. We believe it faces two challenges.
- First, nursing homes have been a major source of novel coronavirus outbreaks, which may encourage individuals needing health care in a residential setting to seek other options. Nursing home residents represent about 1% of the U.S. population, but 40% of Covid-19 deaths and intensive care patients.
- Second, the high occurrence of novel coronavirus transmissions in the facilities could trigger Washington, D.C., to implement new regulations that could be burdensome to nursing homes.
Upon facing a potential decline in demand from patients and increased regulatory costs, nursing homes that are not well managed could be forced to negotiate more favorable lease rates and some nursing homes may fail, thereby decreasing revenues generated by Omega’s properties.
Focus on Fundamentals
At Alger, we believe in-depth fundamental research can potentially identify companies that are best suited to reward investors with strong earnings growth by creating disruptive products and services. Disruption is particularly strong in the Health Care sector, which is experiencing a surge of innovation, but it is also prevalent across the economy, with the trend of online retailers capturing markets share from brick and mortar stores being just one of many examples of technology-driven business models displacing legacy companies. As we conduct fundamental research, we strive to find companies with potential for earnings growth that exceeds investors’ expectations. At the same time, we seek out companies that are victims of change as potential short positions.
You can also learn more about long/short investing with Alger here.
This material is not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of March 2021. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Holdings and sector allocations are subject to change.
Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Investments in technology and healthcare companies may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Short sales could increase market exposure, magnifying losses and increasing volatility.
Short selling (or “selling short”) is a technique used by investors who try to profit from the falling price of a stock. It is the act of borrowing a security from a broker and selling it, with the understanding that it must later be bought back and returned to the broker. In order to engage in a short sale, an arrangement is made with a broker to borrow the security being sold short. In order to close out its short position, the security will be replaced by purchasing the security at the price prevailing at the time of replacement. A loss will be incurred if the price of the security sold short has increased since the time of the short sale and may experience a gain if the price has decreased since the short sale.
Quidel Corp. represented 0.70% of Alger’s firm-wide assets under management as of December 31, 2021. Short position Omega Healthcare Investors represented less than -0.01% off assets.
This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds.