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- Industries that have been most impacted by the COVID-19 pandemic are set to gain the most from the administration of a successful COVID-19 vaccine, according to UBS.
- The biggest surge in profits in a back-to-normal, post-pandemic world will likely be realized in industries within the energy, homebuilding, and financial sector, UBS explained.
- But investors need to be cognizant of the fact that a surge in profits may not be enough to offset a surge in debt and equity dilution by companies that struggled to survive during the pandemic.
- “For instance, Airlines would need to rise by a further ~60% to get back to January levels. However, debt levels have surged for most of the hardest hit industries such as airlines such that the upside for those levered stocks may be less than hoped,” UBS said.
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The devastating economic impact of the COVID-19 pandemic on certain industries could be on the verge of reversing, especially with prospects of a successful COVID-19 vaccine rising into 2021.
To capitalize on a potential recovery, UBS has highlighted specific groups of companies that will likely experience a snap back in profits in 2022 and that also have upside potential in their stocks.
“With many of the most impacted industries like energy, airlines, hotels and banks still down well over 30% YTD, the upside to a positive vaccine outcome is considerable,” UBS said.
But investors should beware that a surge in profits during an economic recovery may not directly flow into a surge in stock prices if the company in question took on a lot of debt and equity dilution to remain solvent throughout the pandemic, according to UBS.
“For instance, Airlines would need to rise by a further ~60% to get back to January levels. However, debt levels have surged for most of the hardest hit industries such as airlines such that the upside for those levered stocks may be less than hoped,” UBS explained.
With this in mind, UBS set out to identify the top industries that are levered to an economic recovery but have not had a massive surge in debt, thus resulting in better risk-adjusted upside for stocks within that industry.
The firm compared potential upside to changes in 2022 EPS estimates since January to account for any large shifts in relative fundamentals, while keeping balance sheet factors in mind.
The top industries expected to experience significant upside to profits, their enterprise value, and therefore their stocks, are the oil and gas storage industry, followed by homebuilders, integrated oil and gas, and the life and health insurance industries.
"Energy, financials, homebuilders, household durables stand out as having better risk adjusted upside when comparing potential upside to Jan-Feb enterprise value vs how much 2022 EPS has changed YTD," UBS explained.
Durable goods, diversified banks, property and casualty insurance, oil and gas exploration and production, automobiles, and aerospace and defense industries round out the list, according to UBS.
On the flip side, the industries that will be sensitive to positive news surrounding a COVID-19 vaccine development, but upside potential will likely be capped due to the surge in debt and equity dilution they took on to survive the pandemic include: auto components, hotels & leisure, and airlines, UBS said.
As investors search for beaten down stocks within industries that are set to benefit from an economic recovery in a post-pandemic world, avoiding industries with increased debt loads and equity dilutions could help increase the potential for more upside, according to UBS.
