Sector Spotlight: Are Zika Stocks About to Jump?
Recent information linking Zika virus to congenital malformations in Brazil could provide investors with a reason to buy virus related stocks:
- Zika virus is transmitted by mosquitoes. It originated in Africa and made its way to the Pacific in the early 2000s. But then something changed as the virus moved to South America where it is believed that as many as one million Brazilians could be infected.
- Current data suggests that in Brazil it has caused severe defects in the brain of the unborn, leading to a higher incidence of microcephaly, a condition where the brain and the head remains small and thus the sufferer does not fully develop intellectually. There have now been reports that as many as 5000 pregnant women in Colombia may be infected, and there are projections for as many as 600,000 men and women as likely to be infected by June of 2016 in the country. There have been reports of cases in Puerto Rico as well.
- A recent study suggests that the virus could expand its reach further via the blood of travelers who have been bitten by virus carrying mosquitoes as they return to the U.S. from other parts of the world and that the virus could be brought into areas of the U.S. which hold as much as 60% of the population. Let us put that into proper perspective. This would mean that over 200 million people could be exposed to Zika virus in the U.S., according to a study of travel patterns and projections by the National Institutes of Health (NIH).
We note that “the story is unfolding, which means that we don’t know what we don’t know at this point. What we have is some preliminary data based on studies from Brazil and French Polynesia which suggests that there is a link to central nervous system defects in newborns and Zika virus as well as case reports and rapidly emerging information in many formats from other areas of the world. Other conditions aside from microcephaly that may be related to the virus could include a viral paralysis syndrome and other nervous system abnormalities in newborns. “
Our conclusion is that Zika virus is a real threat, although its full reach is yet unknown. This uncertainty is likely the reason why companies that are being linked to Zika are having some false starts. It is, however, worthwhile to keep Zika virus in mind as it could be the canary in the coal mine. This humble doctor’s opinion is that we may be in the early stages of a resurgence of infectious diseases as major contributors to the status of public health in the U.S., and the world.
And while our conclusion, based on those facts, is sound, we are also wondering why stocks that, based on sound fundamentals related to the known information about the virus aren’t jumping higher. This brings us to the evolution of this story based on additional information that is emerging.
There are some reports, which may not amount to anything more than rumors and conspiracy theories, floating around that the mosquito’s link to the virus and congenital deformities is just a story. These unsubstantiated and unconfirmed rumors are linking pesticide use as the cause of the congenital malformations and raise the possibility of a coverup of the truth. To be sure, according to a report in The Washington Post there have been cases of microcephaly that have been reported during this period that have not been linked to Zika virus and the incidence of the cases in Brazil may be overstated as the numbers may include normal children with smaller than normal head circumferences. Some of this data is being linked to two possibilities. One is the quality of the measuring instruments used to determine the size of the newborn’s heads. The other is that perhaps there is more microcephaly in Brazil than was previously known caused by other factors that may or may not be related to Zika virus.
However, reports that the genome of Zika virus has been deciphered by Brazilian public health officials and that the data links Zika to microcephaly surfaced. According to CNN: “The researchers at Federal University of Rio de Janeiro’s molecular virology lab analyzed the virus taken from the amniotic fluid of pregnant women, and the scientists also isolated the virus in the brains of fetuses with microcephaly who died in Paraiba state in northeastern Brazil right after birth, the agency said.”
We are not weighing in on the rumors, one way or another on whether they may be truth or fiction. But, it is plausible that investors with access to what they consider reliable information may be aware of these rumors, and perhaps of more than rumors, meaning reports such as The Washington Post’s as well as private information, which would account for the fairly muted response in some of the stocks who should benefit from Zika virus related influences. The story about the genome deciphering of Zika virus and the presence of the virus in the brains of microcephalic fetuses could be a game changer and may be the fact that jump start these stocks. We will be watching for whether this story becomes a significant factor or not. The facts continue to evolve and we will stay with this story.
Rollins Inc. (ROL) – Buy at $27-29. Sell Stop at $25. Initially recommended on 2/22/16.
Rollins Inc. (ROL) is a very special situation with a relationship to biotechnology in the current environment. Rollins owns Orkin, the exterminating company, and could be a big beneficiary of the current health concerns regarding Zika virus. It also owns other businesses, including TruTech and Critter Control which focus on wild life control. The company also focuses on bed bug and other pest extermination. This is a highly speculative trading situation which may have a short term lifespan but may also be increasingly powerful given the current potential for the rise in incidence of parasitic and animal vector related diseases. Thus, in the current market it’s an interesting story stock to consider.
Rollins is not a cheap stock trading at 39 times past earnings. Its most recent quarter delivered modest growth in both earnings and revenues, in the 5-6% range, which although not too exciting, is likely sustainable given the nature of the business. The company continues with a steady expansion plan including the addition of several international franchises, focusing on areas with large pest populations. It continues to invest in technology, recently updating support and analysis systems and including communication and software tools to its employees in order to maximize their interaction with customers.