Why Covid-19 Testing Stocks Are Selling Off Despite Surging Demand

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Our indicative theme on Covid-19 Testing Stocks – which includes companies that produce or carry out tests for Covid-19 infections – has underperformed considerably thus far in 2022, declining by about 13% year-to-date, compared to the S&P 500 which has declined about 2% over the same period. The sell-off comes despite a surge in demand for Covid-19 testing kits and services, driven by daily U.S. Covid-19 cases at highs of over 800,000 over the last week, as the highly infectious omicron variant spreads. The current surge is helping the companies in our theme. For example, Quest Diagnostics (DGX) recently raised its full-year guidance for 2021, signaling higher demand for testing through the end of December, while Abbott Laboratories (ABT) also sees testing demand holding strong in the near term. So why are testing stocks declining now?

It appears that the markets are now looking beyond the current phase of the pandemic into the longer term. There is a real possibility that demand for Covid tests is peaking as therapeutic options for Covid-19 improve and as the virus potentially gets milder (the omicron variant itself apparently has a lower rate of severe disease). Moreover, considering that testing stocks have provided solid returns over the last two years (about 47% in 2020 and around 22% in 2021), investors are likely reducing exposure to these stocks.

Within our theme, Abbott Laboratories has declined the least, year to date, falling by about 9%. On the other side, Quest Diagnostics stock has declined the most, falling by almost 18% year-to-date, given that the company is more dependent on Covid-19 tests compared to rivals.

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Below you’ll find our previous coverage of the Covid-19 testing theme where you can track our view over time.

[12/20/2021] Omicron Brings Covid Testing Stocks Back In Focus

Our indicative theme on Covid-19 Testing Stocks – which includes companies that produce or carry out tests for Covid-19 infections –  is up by 24% year-to-date, roughly in line with the S&P 500. While we were somewhat cautious about the long-term prospects for Covid-19 testing stocks in 2020, considering the progress made on the vaccine front, it’s now quite clear that Covid-19 testing demand will be here to stay in the near to medium term, as the pandemic proves difficult to contain given the diminishing immunity provided by vaccines and the constant mutation of the virus.

In fact, Covid-19 cases are soaring to the highest levels seen since the pandemic began in highly-vaccinated regions including the U.K and New York. The surge in new cases is likely driven by the highly contagious, but apparently less severe, new virus variant called omicron. Considering this, testing will remain key to containing the spread of Covid-19 and keeping the broader economy open. That being said, we probably wouldn’t look for outsize gains in testing stocks either, as Covid-19 treatments are getting better, with updated booster vaccines also looking like a real possibility in the coming months. Investors are also mindful of the relatively volatile nature of testing demand and revenue, which varies with Covid-19 infection numbers.

Within our theme, Laboratory Corp. of America (LH)has been the strongest performer gaining about 53% year-to-date, driven by strong demand for Covid-19 tests and a recovery in demand for testing and diagnostics outside of Covid. On the other side, Quidel (QDEL), down about 11%, was the weakest performer, given the company’s mixed quarterly earnings through 2021 and its sizable dependence on Covid tests.

Below you’ll find our previous coverage of the Covid-19 testing theme where you can track our view over time.

[10/13/2021] Covid Testing Stocks To Watch As The Holidays Near

Our indicative theme of Covid-19 Testing Stocks, which includes medical devices and diagnostic companies that are involved in Covid-19 testing – is up by about 69% year-to-date, significantly outperforming the S&P 500 which is up by about 8% over the same period. Testing is viewed as key to containing the spread of the Coronavirus pandemic and re-opening the economy until a safe and effective vaccine is developed. It’s likely that the demand for testing products and services is likely to rise with the coming holiday season. For example, as travel picks up, testing is likely to be key to improving confidence for passengers while potentially helping to reduce quarantine restrictions. Within our theme, Quidel (NASDAQ: QDEL) has been the strongest performer gaining about 260% year-to-date, while Quest Diagnostics (NYSE:DGX), up about 11%, was the weakest performer. Below is a bit more about these companies.

Quidel (QDEL) is a company that sells diagnostic healthcare products including rapid diagnostic testing solutions, cellular-based virology assays, and molecular diagnostic systems. The company doubled down on the Covid-19 testing over the last two quarters, and its stock is up a solid 261% this year.

QDEL

Hologic (HOLX) sells medical devices for diagnostics, surgery, and medical imaging.  The company currently has two molecular diagnostic tests for Covid-19 including the Panther Fusion and Aptima tests. The stock is up by about 31% year-to-date.

Abbott Laboratories (ABT) has a diverse range of solutions including a test called BinaxNOW that provides test results in 5 minutes and works without relying on lab equipment. The stock is up by about 29% year-to-date.

Laboratory of America (LH) operates one of the largest clinical laboratory networks in the world.  While the company’s general diagnostic business proved a mixed bag over the last two quarters as doctors’ visits declined due to the pandemic, it has scaled up the capacity and accessibility for Covid-19 tests. The stock is up by 14% year-to-date.

Quest Diagnostics (DGX) is one of the largest U.S. diagnostics chains that has been impacted by the pandemic, the company’s large-scale Covid-19 testing has compensated for this to an extent. The stock is up by 11% year-to-date.

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 Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 ABT Return -9% -9% 234%
 S&P 500 Return -2% -2% 108%
 Trefis MS Portfolio Return -7% -7% 264%

[1] Month-to-date and year-to-date as of 1/16/2022
[2] Cumulative total returns since the end of 2016

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