Don’t Get Married to the Bird Flu Stock Bump

by James Brumley | April 10, 2013 2:22 pm

Don’t Get Married to the Bird Flu Stock Bump

The good news is, prior outbreaks of unusual flus have never turned into the pandemics some assumed they would become. The bad news is, just because swine flu and bird flu didn’t end up wiping out mankind doesn’t mean that fears of a global plague didn’t have an impact on some publicly traded companies.

Both realities are worth keeping in mind while we work our way through another bird flu outbreak in China.

As of the most recent tally, flu strain H7N9 has claimed nine lives and infected a total of 28 people — all in eastern Asia. It should also be noted that all 28 infected patients somehow came in contact with infected birds; no human-to-human transmission has been observed yet. Still, as difficult as bird-to-bird transmission is to contain, government officials in China are far from breathing easy.

Meanwhile, assumptions and speculation regarding the 10-day-old outbreak have led investors to make buy or sell decisions of affected stocks. So who’s on the winning and losing ends of the current contagion?

Winners

Much like the swine flu worry did in 2009, along with 2004’s bird flu outbreak, the current uncontrolled spread of H7N9 is putting an intense focus back on biotech companies that make — or even just potentially can make — a drug that can treat this particular strain of flu.

BioCryst Pharmaceuticals (NASDAQ:BCRX[1]) is one of those stocks. In fact, BioCryst might be the biggest beneficiary of the current bout with bird flu so far. Shares had rallied as much as 70% at one point after the brewing pandemic became well-publicized, though they have since pulled back a little. The company’s intravenous drug peramivir might possibly work as a treatment to this particular flu strain, although it’s still not clear if it’s the best treatment option. Still, with peramivir being the front-runner for an emergency approval in China (and no other contender in sight), that’s good enough for investors right now.

GlaxoSmithKline (NYSE:GSK[2]) also has been thrust into the limelight, being one of the bigger contributors to the stockpiling of swine flu vaccines in 2009. It’s also best equipped to custom-make a lot of H7N9 vaccine, should the world’s governments decide widespread availability is necessary.

Losers

It’s obvious to the point of being easy to overlook, so it needs to be explicitly noted — a deadly virus outbreak isn’t good for the host country’s economy, or its stocks. As proof of that reality, the iShares FTSE China 25 Index (NYSE:FXI[3]) hit a low point for the year on Friday, when the panic was at its peak. Although the fund and China’s stock market have bounced a little since then, it continues to struggle.

It’s not just Chinese stocks feeling the pressure, though. Plenty of U.S. stocks are impacted too.

Take Yum Brands (NYSE:YUM[4]) for instance. The operator of Taco Bell, Pizza Hut and KFC drives roughly half of its sales and earnings from its 3,700 locales (mostly KFCs) in China, each of which uses local chicken suppliers. It remains to be seen exactly how Chinese regulators will clamp down on the supply chain, but it’s relatively certain that chicken will be tougher to buy in the near future. And, whether or not chicken becomes a scarcer commodity, worried Chinese consumers are apt to steer clear of it for a while — at least until it’s clear there are no lingering health risks.

Airline stocks also are suffering in the wake of the potential contagion, though most of the slump has been limited to Chinese airlines like China Southern Airlines (NYSE:ZNH[5]) and China Eastern Airlines (NYSE:CEA[6]). Both lost about 7% of their value last Friday when the outbreak was at the peak of its publicity. While both stocks bounced a little earlier this week, the sellers are back at it again today. The worries are twofold: (1) Nobody in China wants to go anywhere they could be exposed to the disease, and (2) the government might crimp travel … although a regulatory halt of air travel is very unlikely.

Bottom Line

As alarming as an uncontained outbreak of a deadly flu virus is, the media’s pervasive coverage of it is even more alarming — the worst-case scenario is often treated by reporters as the most likely outcome.

It’s a big mistake to take their comments to heart, though. We heard nothing but doomsday prediction with SARS, the first round of bird flu and swine flu, and none of them ever spun out of control. This latest batch of H7N9 mania is likely to be a repeat of the last few, ending uneventfully, with most of these stocks reverting back to their prior trends within a few weeks.

Point being, don’t get married to the way things seem right now. This will blow over soon enough.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BCRX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BCRX
  2. GSK: http://studio-5.financialcontent.com/investplace/quote?Symbol=GSK
  3. FXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXI
  4. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  5. ZNH: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNH
  6. CEA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CEA

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