Vaccines Are Coming Soon. Is It Time to Sell Stay-at-Home Stocks?

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The tide is turning in the fight against the coronavirus.

Two pharmaceutical companies, Pfizer, in partnership with BioNTech, and Moderna, have announced successful phase 3 trial results with efficacy rates above 90% — much higher than expected — and a number of other drug companies are on track to release late-stage results in the coming weeks. For Pfizer and Moderna, FDA approval is expected soon, and Dr. Anthony Fauci, the director of the National Institute for Allergy and Infectious Diseases, has said that healthcare workers could have access to a vaccine as soon as December, with the average American being able to get vaccinated by April if things go well.

Not surprisingly, that news has shaken the stock market. When Pfizer became the first company to announce successful Phase 3 results on Nov. 10, recovery stocks, along with the Dow Jones Industrial Average and the small-cap Russell 2000 index, got a big boost while the Nasdaq sank, a sign that investors were selling “stay-at-home” stocks like Zoom Video Communications (NASDAQ:ZM), Peloton Interactive (NASDAQ:PTON), and Wayfair (NYSE:W), among others, and rotating into stocks that will benefit from the economic reopening, like those in the travel, entertainment, and energy sectors.

As you can see from the chart below, all three of those stocks have fallen sharply since the Pfizer news came out, even as the S&P 500 has continued to gain.

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The trio of stay-at-home stocks have been big winners this year, but the market now seems to have other thoughts. Is it time to sell coronavirus stocks like Zoom, Peloton, and Wayfair? Let's take a look back at 2020 before examining what the future may hold.

A coronavirus boom

It's an understatement to say that Zoom, Peloton, and Wayfair have gotten a tailwind from the coronavirus pandemic. All three companies have experienced dramatic spikes in business that would not have happened without a crisis that's reshaped the way people communicate, exercise, and shop. These stocks have all experienced monster gains this year, as the chart below shows, driven by a temporary surge in revenue growth.

You can see from the chart below that revenue took off for all three of these companies once the pandemic struck in March.

The trends driving these companies — working from home for Zoom, working out from home for Peloton, and e-commerce combined with home improvement in the case of Wayfair — will remain strong for the duration of the pandemic, but we now know that the public health crisis that has significantly altered daily life in the U.S. will likely come to an end, and probably in just a few more months.

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The end is nigh

When the pandemic is over, we'll likely see an overwhelming return to the behavioral norms, a reversion to the mean. Americans will no longer be afraid of gathering together and potentially contracting a deadly virus. Offices will reopen and white-collar workers will return. Gyms and yoga studios will spring back to life along with the gym rats who have missed them, and shoppers will return to stores and spend at least some of their discretionary income on vacations and restaurants rather than home goods.

That means a post-coronavirus hangover is coming for all three of these stocks. They all have different business models and will deal with the aftermath of the pandemic differently, but they'll experience headwinds from the normalization of the economy, much as they got tailwinds from the pandemic. Still, they'll retain a good portion of the customers they gained during the crisis, but delivering growth on top of what's been a highly unusual year will be difficult, and these companies could see four quarters of weak results as they lap the skyrocketing growth of the pandemic era.

Is it time to sell?

All three of these stocks are leaders in their various sectors and there's no doubt the pandemic has only entrenched them further as the top dogs. Gone are the questions about whether Zoom has an edge over Skype, or whether Peloton is too expensive to go mainstream, or whether Wayfair can ever be profitable. Even factoring in the coming headwinds, these companies will have gotten an overwhelming net benefit from the public health crisis, which has greatly increased their customer base and brand awareness.

But the impending arrival of a vaccine means that there's now a cloud hanging over these stocks, and that's unlikely to go away. Valuations at all three of these stocks soared during the crisis, and it will take time for these companies to grow into those new price tags. This is especially true because their growth rates will soon decelerate, as much of the growth they would have experienced has been pulled forward. Netflix, another popular stay-at-home stock, has already experienced this phenomenon.

Still, over the long term, the future continues to look bright for these companies, and their growth rates should reaccelerate once the difficult year-over-year comparisons to the past few quarters have passed. Those future growth rates could return to near pre-crisis levels, which for Zoom and Peloton were very strong (in the high double digits). All three of these companies are leaders in fast-growing industries — videoconferencing, connected fitness, and online home furnishings, respectively — and those industries still have bright long-term prospects.

However, investors need to recognize that 2020 has been an anomaly, and these companies have been useful service providers during a crisis. They're selling umbrellas in a torrential downpour, but the storm will eventually pass.

People will still need and want the services that Zoom, Peloton, and Wayfair provide, but investors in these stocks should expect some significant volatility short term as these companies will soon be operating in a much different environment.