Deep Dive: Three stocks that are ‘part of the solution’ to the coronavirus crisis

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Amy Zhang of Fred Alger Management owns three innovative companies in her funds that she expects to be “part of the solution” to the coronavirus crisis, as they help with diagnostic testing, mass notification and telehealth services.

Zhang has managed the Alger Small Cap Focus Fund AOFAX, -2.40%  since February 2015 and the Alger Mid Cap Focus Fund AFOIX, -0.70%  since it was established in June 2019.

She has long followed a concentrated strategy of selecting innovative companies with strong balance sheets and excellent growth prospects. This has served both funds well during the coronavirus market crash, as you can see below. (The Alger Small Cap Focus Fund is “soft-closed,” meaning only current investors may buy more shares.)

‘Part of the solution’

During an interview March 18, Zhang said the health-care sector is “much more defensive” than the technology sector.

“Technology has slowed down a lot,” and “industrials are even more economically sensitive,” she said. She emphasized the importance of careful stock selection, saying that health care “has the most dispersion between winners and losers.”

Here are three stocks she owns that she expects to perform well over the long term as the companies develop products and services to help not only with the corinavirus crisis, but with enhanced approaches to the management of other epidemics.

Quidel

Quidel QDEL, -3.21%  makes rapid diagnostic testing kits in four categories: rapid immunoassay, cardiac immunoassay, specialized diagnostics and molecular diagnostics. On March 17, the company received emergency use authorization from the Food and Drug Administration for its Lyra SARS-CoV-2 Assay — a testing kit “for the qualitative detection of nucleic acid from SARS-CoV-2 in nasopharyngeal or oropharyngeal swab specimens from patients suspected of COVID-19 by their health-care provider.”

Flu testing has long been a major product and service focus for Quidel. Zhang said she has invested in Quidel for 10 years, and she believes the coronavirus outbreak will make people more interested in flu testing. The Centers for Disease Control estimates there have been between 12,000 and 61,000 deaths from influenza annually in the U.S. since 2010.

Zhang expects Quidel will be successful in deploying a point-of-care combination test for influenza A and B and the COVID-19 coronavirus “for the next flu season” this fall, “with a 20-minute result.”

“It is in their wheelhouse,” she said.

Quidel was the largest holding of the Alger Mid Cap Focus fund as of Feb. 29. The stock has returned 22% this year through March 18, compared with a 28% decline for the Russell Mid Cap Growth Index RMCCG, -4.04%  and a 37% drop for the Russell 2000 Growth Index RUO, -3.54%.

Everbridge

Everbridge EVBG, -3.13%  was the third-largest holding of the Alger Small Cap Focus Fund as of Feb. 29, being held by Zhang since 2016. This is a software-as-a-service company, which Zhang called “a leader in critical event management,” or CEM. Everbridge provides software used for mass notifications. Automated messages can be sent to help protect people and keep businesses and government agencies running during all sorts of emergencies.

The company says these messages can be sent through over 100 different types of communication devices, and that the systems can “track progress on executing response plans.”

Zhang called Everbridge “the best in class, with the broadest platform,” and said the company had deployed several million messages related to the coronavirus, locally, nationally and globally this year.

“They still have catalysts — With COVID-19, adoption will accelerate. But over long term, we think the company is well-positioned, with other catalysts,” Zhang said.

Everbridge’s shares were up 47% year-to-date through March 18.

Teladoc

Teladoc Health TDOC, +1.51%  is a pioneer in telehealth, facilitating virtual health care services that connect health providers to patients remotely. This is of obvious importance during the COVID-19 outbreak, but it is also in keeping with the long-term trend of cloud collaboration and greater efficiency. During the current crisis, a virtual meeting with a health provider is of obvious importance but, other than that, many routine visits to doctors’ offices, with their associated long wait times and other inefficiencies, can be replaced by telehealth.

On March 17, the Centers for Medicare & Medicaid Services (CMS) announced that President Trump had expanded Medicare telehealth coverage, allowing seniors to communicate with doctors without taking the risk of office visits, for an expanded variety of care scenarios. Click here for the announcement, which has links to documents that provide details to patients and providers about expanded service coverage.

“This is a positive for Teledoc. They’re the leader,” Zhang said, adding that the company is another example of “us wanting to be part of the solution,” through the investment portfolios.

Teladoc said March 13 that it had facilitated about 100,000 U.S. virtual visits in seven days, which was a 24% increase from a year earlier, and a 50% jump from the previous week.

Teledoc’s stock has returned 64% this year through March 18.

‘I was … worried about the crisis in January’

“I do not like companies that are economically sensitive,” Zhang said, emphasizing strong balance sheets (“leverage kills”), along with “wide moats” to protect businesses from new competitors. She drew an analogy between “sail boats,” which rely on tailwinds and are economically sensitive, and “motorboats,” that “control their own destiny.”

So she built up cash early this year, in part because tech-stock valuations had risen so high, but also because she was sensitive to the early news of the coronavirus outbreak in China.

“I actually was already worried about the crisis in January,” she said.

It took some time for the broad U.S. market to catch on to the scope of the problem — the S&P 500 SPX, -4.34%  set record intraday and closing highs Feb. 19.

Zhang said her portfolios are relatively well-protected because they are made up of companies “at the cutting edge of innovation.”

“Long-duration assets — small- and mid-cap stocks — should come out stronger on the rebound,” she said.

Significant outperformance in 2020

Here’s how the Alger Small Cap Focus Fund’s class A shares (excluding sales charges, but after expenses) have performed this year through March 18, compared with its benchmark, the Russell 2000 Growth Index:

FactSet

Here are 2020 total returns, through March 18, for the Alger Mid Cap Focus Fund’s class I shares and the Russell Mid Cap Growth Index:

FactSet

Zhang emphasized the funds’ outperformance on March 18 as evidence that her quality approach holds up even over the short term. The Alger Small Cap Focus Fund was down 6.1% for the day, while its benchmark, the Russell 2000 Index fell 10.4%. The Alger Mid Cap Focus Fund declined 4%, and its benchmark, the Russell Mid Cap Index, lost 8.2%.

Top fund holdings

Here are the top 10 holdings (of 49) of the Alger Small Cap Focus Fund as of Feb. 29:

You can click on the tickers for more about each company.

You may have to scroll to the right to see all the data.

Here are the top 10 holdings (of 49) of the Alger Mid Cap Focus Fund as of Feb. 29

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