Received 20 March, 2020; Revised: 00 Month 0000 Accepted: 00 Month 0000

WORKING PAPER

Investment analysis and strategy for Covid-19

Renjun Li | Ruixin Zhang | Meichen Zhang | Qingquan Zhang

Gies College of Business, University of

Illinois at Urbana-Champaign Abstract
IL,US
In this paper, we discusses the investment analysis and strategies of recommended
industries during the Covid-19 outbreak period.
We mainly focus on three markets: Health care industry, Luxury good industry and
one of the most important investment instruments: silver and copper ratio. Firstly,
the paper talks about the reasons for choosing the markets. Through the industry
and company analysis in these three markets and according to their performance
and stock price changes in this special period, the paper propose several investment
strategies and suggestions. Besides, according to each investment strategies, we also
implemented the back testing for evaluation.
This study provides meaningful guidance and new insights for investors to manage
money during Covid-19.

KEYWORDS:
Covid-19; Coronavirus; Industry Analysis; Investment Strategy.

1 INTRODUCTION

History has shown that it can be a good bet for investors to take actions when there is hard hit on financial market. To be more
specific, as we can see in the United States, the market has been witnessing turmoil, enough to push major benchmarks to close in
the red. On Feb 25, the S&P 500 Index dropped 3%, the Dow fell 3.2% and the Nasdaq Composite closed 2.8% lower. Investors’
fear is quite evident as the fear-gauge CBOE Volatility Index’s (VIX) increased 11.3% to close at 27.85, clearly indicating panic.
With regard to the literature about investment during outbreak, it can be roughly divided into two strands. For one thing,
there are specific industry that are primarily affected by Coronavirus. As is known to all, Coronavirus has some similarities with
SARS, therefore, we decide the most influenced market by considering the economic influences of SARS.
According to Chen, Chen and Tang (2009), the positive impacts of the SARS outbreak was to simulate the demand for
respirator masks (such as N95) and other related production (such as fluorescent lights), which leaded he production of health
care indeed to increase sharply. Besides, according to Arjun, Lawrence, Daniel Jernigan(2004), Healthcare facilities were at
the center of the SARS outbreak of 2003 and played a key role in con-trolling the epidemic (Arjun, 2004). Additionally, the
SARS disease and COVID-19 have strong similarities and there are some evidences from SARS defense experience to prevent
epidemic of COVID-19 (Prompetchara E., 2020). Therefore, when an outbreak occurs, the nation will invest more money in
the healthcare industry to look for more medical solutions. Meanwhile, as public health consciousness improves, demand in the
masks have been increased dramatically for a long time. Therefore, Covid-19 outbreak is a positive stimulation for healthcare
industry which we should pay attention to primarily when investing.
Secondly, it has been proved that there were great negative influence on global tourism after SARS. (Overby et al., 2004).
Besides, Dombey (2004) also pointed out that due to SARS, the number of tourists decreased dramatically in 2003 and this
effect was global. However, they didn’t talk too much about the tourism-related businesses. Therefore, in our paper, we choose

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3563300
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luxury goods industry which depends heavily on tourism. Since the outbreak happened during Spring Festival, which is the
biggest visitors flow rate in China, There is no doubt that it received a great shock.
Thirdly, we focus on silver and copper ratio. It is because under the risk-averse atmosphere, investment in precious metals
is of high importance. As Simmons (2020) said that precious metals serve an important indicator of global financial health.
Besides, we also learn from LONDON Reuters (2020) that Gold’s relative value to copper has surged to its highest in more than
a decade as the spread of coronavirus hammers metals with industrial applications. Therefore, the falling trend of copper versus
the increasing trend of silver price motivate us to focus on these commodity ratio.
For another, additional research attention has been paid to the methods that have been explored to better investment. First,
according to Mao and Yu (2015), it’s a very effective way to use cash flows to forecast enterprise performance. Then, Bae and
Park (2011)’s research shows that there is a strong correlation between earnings data and the financial circumstance of certain
industry. Last, when we reviewed the thesis of the Givoly (2013)’s team, it shows an innovative way to utilize stock prices and
accounting data to measure and predict the demand of certain company’s products, which is consistent of the idea of our thesis.
This paper is to uncover the possible positive and negative impacts on specific industries during the COVID-19. Investors
perhaps not only can avoid capital losses but also gain profits by re-allocating their portfolios. We thus select three markets:
Health care industry, Luxury good industry and one of the most important investment instruments: silver and copper ratio.
The plan of this paper is organized as follows. The following section presents the data and analysis methodology. The final
section’s summary remarks conclusion of our investment strategy.

2 HEALTHCARE INDUSTRY ANALYSIS

2.1 Fundamental analysis

FIGURE 1 Mean in 2000-2002.

Source: Captial IQ

We search for the monthly total return data of five sectors, including Health Care Equipment Services, Food Beverage
Tobacco, Food Staples, Pharmaceuticals, Biotechnology and Life science, Household Personal Products, and Utilities in
2000-2002 and 2007-2012. Both of the periods are economic downturn. After annualizing and sort them, we find the indus-
try performing best is Health Care Equipment Services in 2000-2002 and Health Care Equipment Services is the second best
industry in investment performance in 2007-2012.
Given the spread of Covid-19, healthcare stocks seem to be a prudent investment as the potential discovery of a cure could
lead to huge gains. In the short term, the outbreak will promote the chain drugstores to achieve higher performance growth. In
the long term, the enterprises in healthcare industry will continue to develop, especially for those specialized in diagnose and
vaccine.

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FIGURE 2 Median in 2007-2012.

Source: Captial IQ

2.1.1 CVS Health Corp.

FIGURE 3 Top U.S. pharmacies ranked by prescription drugs market share in 2019.

Source: Statista

For this part, we would like to encourage investment in CVS Health (NYSE:CVS).
As the data showed, in CVS’s recent fourth-quarter results, the company raised its guidance, projecting annual revenue of
$262.0 billion to $265.5 billion, up 2% to 3.5%. The healthcare giant also handily beat estimates for the fourth quarter, bringing
in $66.9 billion in revenue as opposed to the $64.0 billion expected by Wall Street.
As the figure 3&4 show that CVS Health held over 24 percent of the prescription drug market revenue in 2019, ranking first.
Meanwhile, CVS alone controls more than half the market in Washington DC, Boston, Providence and Honolulu—where the
chain has more than 75% of the market.

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FIGURE 4 Drug Store Market share.

Source: Metro Market Studies and Barclays Research

Besides, the long-term position for CVS also looks good, there’s a strong case to be made that the company can benefit from
the COVID-19 situation. Recently, CVS and Walgreens warned Americans that there could be major shortages of hand sanitizer
and other cleanliness products as the COVID-19 outbreak gets worse. Short-term sales of products at CVS’s retail pharmacies
could quickly shoot up over the next few weeks, while visits to its 1,100 or so medical clinics could rise as COVID-19 fears grow.

2.2 Quantitative analysis

2.2.1 CVS Health Corp.
𝑅𝑂𝐸% = (Net Income attributable to Common Stockholders)∕((Total Stockholders Equity+Total Stockholders Equity)∕count))
𝑊 𝐴𝐶𝐶 = 𝐸∕(𝐸 + 𝐷) ∗ Cost of Equity + 𝐷∕(𝐸 + 𝐷) ∗ Cost of Debt ∗ (1 − Tax Rate)
𝑅𝑂𝐶% = 𝐸𝐵𝐼𝑇 ∕Net PPE + Net working Captial (Current Asset- Current Liability)
Earnings Yield = Earnings per Share (Diluted) (TTM)∕Share Price
Therefore, CVS Health’s annualized ROE % for the fiscal year that ended in Dec. 2019 is 10.87%. ROE measures business
productivity performance and determine the efficiency of CVS Health’s equity capital deployed. Besides, CVS Health’s weighted
average cost of capital is 3.93%. CVS Health’s ROIC % is 6.52%. This means CVS Health returns enough to cover its own
cost of equity. In other words, CVS Health generates higher returns on investment than it costs the company to raise the capital
needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on
new investments in the future will see its value increase as growth increases.
Currently, the stock price of CVS Health is $55.41. CVS Health’s Earnings per Share for the trailing twelve months (TTM)
ended in Dec. 2019 was $5.08. Therefore, CVS Health’s earnings yield of today is 9.17%. As the figure above shows, it is higher
than average level in the industry. With high earnings ratio, CVS raises full-year forecast in 2020, which mostly thanks to mostly
thanks to an increase of people buying health products like cough medicine during the coronavirus outbreak period.

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FIGURE 5 CVS TEV/EBIT.

Source: Capital IQ

2.2.2 Da An Gene Corp.

For this part, we would like to recommend one company in healthcare industry, Da An Gene Company, which has produced the
key products for virus such as Hepatitis B virus, SARS, is now working on developing diagnostic kits for the recent outbreak.
Da an company‘s ROC was 0.9% in 2019 and shows a declining tendency from previous five years tendency data. Poor
performance in business factor says it is not a “wonderful company”. Additionally, the earning yield in April 2020 is 0.384%
and from the chart below, the indicator TEV/EBIT of Da an company always higher than industry average level, which means
that the earning yields are always lower than average level. Therefore, poor performance in bargain price says it does not have
a wonderful price. Thus, it is a good strategy of not investing the company‘s stock.

FIGURE 6 Da An company return of capital.

Source: Captial IQ

However, its Altman z score is 4.92, higher than 3. Therefore, it is not necessary to worry about it likely to go bankruptcy.
Moreover, from the graph above, we can see that on Jan 23, there was a great jump for Da An’s stock price and it remained at a
much higher level compared to the price in 2019. The reason for this is that Da An is in a booming business with gene sequencing
which has become an integral process in many areas of clinical diagnostics and is the primary technology underpinning the

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FIGURE 7 Da An TEV/EBIT.

Source: Captial IQ

burgeoning field of liquid biopsy tests. Our advice is invest it in short term and short it in the long run, meanwhile staying
prudent and careful.

FIGURE 8 Da An stock price change in recent three months.

Source: Bloomberg

2.3 Investment Strategies and Back Testing

For each strategy and name, we set the initial amount of investment is 10000.

2.3.1 3-Day Short and 7-Day Long Strategy for CVS

For CVS, we select trading strategy and signals for a 3 day short and 7 long strategy. We plot the portfolio value in $in figure
9. We can see that this strategy achieve a high yield rate and a value-increasing trend., which makes the portfolio always larger
than the initial value 10000.

2.3.2 Evaluation for CVS strategy (Back Testing)

Then we use maximum drawdown (MDD) which is the maximum observed loss from a peak to a trough of a portfolio. The
figure is showed as below. It means that before a new peak is attained to show the downside risk over a specified time period.
(figure 10)
When evaluating the strategy, we can see that the for 100 trading days, the portfolio Sharpe ratio is 0.82292,which means that
intelligently applied risk parity strategies usually end up here, as does the intelligent selection of factor tilts with ETF portfolios.
For 252 Trading days, the portfolio Sharpe Ratio is 1.3063. Under this circumstance, using momentum in fixed income and
equities boosts returns quite nicely. At this point, leverage is required to realize returns greater than equal to equities. Therefore,
we can say that with this 3 day short and 7 day long strategy, we will receive considerable benefits.

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FIGURE 9 CVS portfolio Value in $

FIGURE 10 MDD for CVS portfolio

2.3.3 3-Day Short and 15-Day Long Strategy for Da An

For Daan company, we select trading strategy and signals for a 3 day short and 15 long strategy. We plot the portfolio value in
$in figure 11. We can see that this strategy achieve a high yield rate and a value-increasing trend., which makes the portfolio
always larger than the initial value 10000. Its Sharpe ratio is 1.9064 and annualized Sharpe ratio is 2.728.

2.3.4 Evaluation for Da An strategy(Back Testing)

Then we use maximum drawdown (MDD) which is the maximum observed loss from a peak to a trough of a portfolio. The
figure is showed as below. It means that before a new peak is attained to show the downside risk over a specified time period.

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FIGURE 11 Daan portfolio Value in $

FIGURE 12 MDD for Daan portfolio

3 LUXURY GOODS INDUSTRY ANALYSIS

Our luxury universe has declined by -11.1% (share price), driven by a PE de-rating of 10.5%. The impact has been greatest for
turnaround stories given the relatively high fixed cost base. We believe that short term pressure will continue and We expect
luxury demand in Q1 to see a significant hit with a sales decline of -16% in this quarter.

3.1 Fundamental/Factor analysis (Compared to situation during the SARS)

We looked to the SARS episode to help us to understand the impact on demand for luxury goods. The SARS epidemic lasted
from November 2002 to July 2003, according to the WHO, reaching its peak in the winter of 2003. In the next figure we charted
the impact on growth rates in the sector. We could see that sales rate dipped in 2Q03 when SARS had the biggest impact on
global travel and global business dynamics. As we showed in the following charts, SARS had a brief impact on luxury demand.

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FIGURE 13 Sales dipped in 2Q03

Source: Capital IQ

We highlight below the key transmission mechanisms of coronavirus on demand for luxury:
(i) Store closures: Retail companies (e.g. Burberry, Capri) in China have stated that around 50% of stores are shut in China.
Some stores are slowly reopening;
(ii) Reduced store traffic: As of the time of writing many cities remain in quarantine and residents in other areas are self-
imposing quarantine measures. As a result we expect reduced footfall at stores that have remained open. It has been
indicated by companies that traffic is plunging by 70 to 90%;
(iii) Limited travel: Given the restricted air travel to and from China since the Lunar New Year, we expect sales from tourists
to be weak. We note, however, that we believe that tourist spend has been probably weaker than expectations but not
dramatically so during the CNY period as most of the international travel restrictions date to after the beginning of the
holidays;
(iv) Supply chain disruptions: Most of our universe relies on Made in Europe production and many companies, especially rely
heavily on Made in Italy. We have as of today no indication that supply is being affected, however this is a risk going
forward. The key for companies will be to show the maximum flexibility in managing the supply chain, whether it is about
sourcing restrictions or the need to reduce manufacturing, or vice versa to resume production more aggressively once
the demand situation normalizes. The ability to shift inventory from one location to the other could also prove a winning
feature;

FIGURE 14 % change in PE

Source: Bloomberg

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FIGURE 15 % change in Price

Source: Bloomberg

(v) A de-rating starting to happen: After a mild market reaction to the coronavirus outbreak, the majority of our companies
have finally seen a pullback from the share price highs in the middle of January due to the coronavirus concerns. Short
term we see potential further downside risk to share prices as shown in the above two figures:

FIGURE 16 Sector share price evolution (indexed to 100)

Source: Bloomberg

FIGURE 17 Luxury company ranking

Source: Bloomberg

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3.2 Technical analysis

We then searched the share price performance for the sector(luxury good) between 2003(SARS) and right now (Coronavirus)
by using the indicator of Sector Average share price, we were shocked that the share price evolution performance right now
mirrors year 2003(First Month).
The outbreak and spread of the coronavirus has posed great risk in the demand from customers for luxury goods. A travel
restrict has not only slowed down the global tourist travel but has also posed great negative impact to wholesale and supply
chain for this sector. After comparison with the share price/PE ratio evolutions around 2003 when SARS was raging, we made
an assumption that Coronavirus can have an huge negative impact on earnings for luxury goods sector in the short-term. For the
investment strategy, you can see from the figure 12&13 that we should decrease our exposure or even short the stand-out stock
Burberry Group, as this stock keeps a high local exposure to China and the derating for this stock’s valuation can be very ugly
from now on.

3.3 Investment Strategies and Back Testing

3.3.1 39-Day Short and 40-Day Long Strategy for Burberry
From above analysis, we can see that we should decrease our exposure or even short the stand-out stock Burberry Group. Besides,
we also give an investment strategies to realize the yield rate close to the Sharpe ratio of the SP 500 index. We select trading
strategy and signals for a 39 day short and 40 day long strategy.
We plot the portfolio value in $ and we can see that this strategy achieve a high yield rate during the outbreak of Covid-19 in
Jan 2020. However, this strategy couldn’t always achieve a high yield rate because of the poor performance of luxury industry.
Therefore, we still hold our conclusion that we should decrease the holdings of Burberry stocks.

FIGURE 18 CVS portfolio Value in $

3.3.2 Evaluation for Burberry (Back Testing)

Then we use maximum drawdown (MDD) which is the maximum observed loss from a peak to a trough of a portfolio. The
figure is showed as below. It means that before a new peak is attained to show the downside risk over a specified time period.
Last but not least, to evaluate the strategy, we can see that the for 100 trading days, the portfolio Sharpe ratio is 0.4082 and
252 Trading days, it is 0.6479. The typical Sharpe ratio equals to a diversified portfolio of stock and bond ETFs. This strategy
is much better than that with active mutual funds but much worse than those portfolio which earn higher returns.
Therefore, we can say that with this 39-day short and 40-day long strategy, we will avoid losing money and also earn during
the virus period. However, according to the ordinary return rate, we still recommend to decrease Burberry holdings.

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FIGURE 19 BRBY MDD

4 SILVER AND COPPER INVESTMENT ANALYSIS

4.1 Fundamental analysis (Industry)

Silver is another popular precious metal. It’s worth a little less than gold making it an easier option to invest in for first-time
investors. During the epidemic period, silver prices decreased slighted firstly then followed by the increasing trend. The main
reason is that the outbreak of the coronavirus as well as the falling of U.S. Treasury yields triggered economic concerns which
pushed safe-haven money into the silver market.
Silver may be slow to start, but when it starts growing it will accelerate. In the past silver has spiked above gold and investors
believe silver will do the same and 2020.
Meanwhile, copper price is showing a dramatically decreasing trend affected by two factors. To be more specific, copper
reflects the properties of macroeconomic, therefore, when the expectation of economic development slows down, the copper
price will fall accordingly. Besides, from the perspective of supply and demand, most affected countries including Japan, South
Korea, Iran and Italy will causing more than 10% even 15% demand downward. Therefore, if the situation continues without
controlling, it can be expected that the copper price will keep decreasing in a long term. Besides, the risk aversion will keep
rising which leads to the increase of the price of silver/copper.

4.2 Technical analysis

From the graph above, we can see that during the epidemic period, silver prices decreased slighted firstly then followed by the
increasing trend in Jan, 2020. Compared to that in Dec 2019, the price of silver had an obvious increase. The main reason is
that the outbreak of the coronavirus as well as the falling of U.S. Treasury yields triggered economic concerns which pushed
safe-haven money into the silver market.
From the graph above, we can see that since Jan 17 in 2020 when the Novel coronavirus pneumonia outbreak in Wuhan, the
price of copper showed a downward trend and reached higher rate of declining when the outbreak occurred nationwide on Jan
23, 2020. According to the two different situations of the development of the coronary pneumonia, the silver-copper ratio was
analyzed according to the two scenarios.

(I). Scenario 1: the outbreak is getting worse than expected in a short period of time.

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FIGURE 20 Silver price commodity change in three months

Source: Bloomberg

FIGURE 21 Copper price commodity change in Jan, 2020

Source: Bloomberg

(II). Scenario 2: Based on China’s experience in prevention and control, the overseas situation can be controlled in a relatively
short period of time.

If COVID-19 is responsible for a short and sharp hit to global economic activity and not a protected global economic slow-
down, then the negative blow to copper demand is likely to be relatively short-lived.If there’s a lasting impact beyond the second
quarter, copper could drop to the $2.20 range.
In summary, the risk of a sharp decline in the silver-copper ratio is relatively small, while the upside is still possible, we can
consider the arbitrage of "long silver, short copper”. In terms of risk, although it is difficult to predict the development of the
coronary pneumonia, we can focus on the index of "newly diagnosed people". If this index shows a decreasing trend in one week,
it is expected that the coronary pneumonia will be controlled in the later period. Based on the logic of “risk aversion caused by
the expansion of overseas epidemic”, once the epidemic is controlled, we would like to suggest stop investing and start selling
when the silver copper price is below 93.

5 CONCLUSION

In conclusion, in this paper we focus mainly on two industries: Healthcare and Luxury Goods and one investment instruments:
silver/copper ratio. We recommend to invest in Healthcare industry. To be more specific, we would like to invest more in CVS
Health and Da An Gene Company in the short term. For the aspect of Luxury, we compare to the similar situation during the
SARS in 2003. Specifically we should decrease our exposure or even short the stand-out stock Burberry Group. Moreover, we
give the corresponding investment strategies with the back testing results. Lastly, we consider the arbitrage strategy of "long
silver, short copper” according to the small risk of a sharp decline in the silver-copper ratio.

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6 REFERENCE

Arjun, S. L. (2004). Foundations of the Severe Acute Respiratory Syndrome Preparedness and Response Plan for Healthcare
Facilities. Infection Control and Hospital Epidemiology, pp. 25(12):1020-1025.
Bae, K.S.; Park, M.H. The effect of asset impairments on effective Analyst’s earnings forecast error and accuracy. Korean
Account. J. 2011, 20, 1–27
Chun-Da Chen, Chin-Chun Chen, Wan-Wei Tang, et al. The Positive and Negative Impacts of the Sars Outbreak: A Case of
the Taiwan Industries. 2009, 43(1):281-293.
Givoly, D.; Hayn, C.; Lehavy, R. Analysts’ cash flow forecasts are not sophisticated: A rebuttal of call, chen and tong. SSRN
Electron. J. 2013, 1–7.
LONDON Reuters (2020). Echoing recession fears, gold’s value rockets versus silver, copper. Retrieved from
https://www.reuters.com/article/us-metals-prices-gold-ratios-graphic/echoing-recession-fears-golds-value-rockets-versus-
silver-copper-idUSKBN2163G3
Mao, M.Q.; Yu, Y. Analysts’ cash flow forecasts, audit effort, and audit opinions on internal control. J. Bus. Financ. Account.
2015, 42, 635–664. Olivier Dombey. The effects of SARS on the Chinese tourism industry. 2004, 10(1):4-10.
Overby, J., M. Rayburn, K. Hammond, and D. C. Wyld, 2004. The China Syndrome: The Impact of the SARS Epidemic in
Southeast Asia, Asia Pacific Journal of Marketing and Logistics, 16(1), 69-94.
Prompetchara E., K. C. (2020). Immune responses in COVID-19 and potential vaccines: Lessons learned from SARS and
MERS epidemic. Asian Pacific journal of allergy and immunology , pp. Vol. 38 (1), pp. 1-9.
Simmons, S. (2020). Gold surges, copper collapses: what comes next for precious metals? Citywire Selector. Retrieved from
https://citywireselector.com/news/gold-surges-copper-collapses-what-comes-next-for-precious-metals/a1319858

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