The world is waiting to get freedom from COVID-19. All eyes are on pharma companies who are researching the COVID-19 vaccine. On November 9, you got the taste of how desperate investors are for the vaccine. Air Canada stock surged 28% in just one day. Even the Oracle of Omaha Warren Buffett, who hoarded cash instead of buying in the March dip, started buying again. This month, he spent almost $2 billion to buy stakes in four pharmaceutical companies, AbbVie, Merck, Bristol Myers Squibb, and Pfizer. Not all these companies are working on the COVID-19 vaccine, however.
How Buffett plans to earn from the COVID-19 vaccine
You must be wondering how Buffett plans to make money from the COVID-19 vaccine. Pizer is leading the vaccine race, but Buffett invested just $136 million, or 7% of his pharma investment, in it.
If you look at Buffett’s investing style, he likes to invest in fundamentally strong stocks that give buybacks and dividends. He bought Apple and sold airline stocks for this very reason. Pfizer stock has a 4% dividend yield. More than pharma, he is eyeing energy stocks to earn from the COVID-19 vaccine.
Buffett has invested US$318.36 million in Canada’s largest integrated oil company Suncor Energy (TSX:SU)(NYSE:SU). But one of his biggest investments is a $10 billion acquisition of Dominion Energy’s natural gas pipeline business in July. You can get a similar exposure as Dominion Energy from Enbridge (TSX:ENB)(NYSE:ENB).
The pandemic created the worst oil crisis of all time as the travel restrictions grounded planes worldwide and reduced global oil demand by more than 80%. The West Texas Intermediate (WTI) crude fell to -$37/barrel in April as oil companies didn’t have a place to store inventory. All oil stocks plunged and reported losses as they had to sell oil at a price that is below the cost they incurred to produce it.
The OPEC+ stabilized the oil price at $40/barrel, which helped oil giants at least get the cost. But Suncor stock will continue to remain low until travel demand returns, as it earns a large portion of its revenue from jet fuel, gasoline, and other petroleum products. Suncor or any single oil company cannot control oil prices. Hence, they are cutting down their costs to improve profits.
The COVID-19 vaccine euphoria started when Pizer announced 90% effectiveness of its vaccine on November 9. This euphoria spiked the WTI crude price to $42.95/barrel. The Suncor stock price is directly proportional to oil price for obvious reasons. Hence, Suncor stock surged 43.5% since November 9.
Suncor stock could double to the pre-pandemic level if the vaccine succeeds in removing travel restrictions and boosting oil demand. Back in October, I recommended a wait and watch approach for Suncor. But its strong third-quarter earnings show that the company will recover from the pandemic stronger and more efficient. Follow Buffett and buy Suncor before the vaccine is out. Your investment will pay off in five years.
Another company that will benefit from the vaccine is the pipeline operator Enbridge, which earns over 50% of its revenue by transmitting oil. Enbridge doesn’t have direct exposure to oil prices, which mitigates its downside when oil prices fall. Moreover, it earns 43% of its revenue from the natural gas transmission that mitigates its risk further.
But Enbridge will see a strong upside when oil demand recovers. As more oil will flow through its pipes, the toll money will start flowing in. Hence, its stock price surged 9.4% on vaccine news.
Invest the Buffett way
Suncor and Enbridge will benefit from the COVID-19 vaccine. Divide your portfolio smartly among the two stocks. If you have $10,000, invest $6,000 in Enbridge and $3,000 in Suncor, and invest the remaining $2,000 in other stocks.
Enbridge is a lower risk stock, and its high dividend yield of 8.3% will partially offset any declines in Suncor. Suncor stock is still risky because of its piling debt and vulnerability to lower oil prices. It will remain as volatile as oil price. Invest in Suncor to get the benefit of the significant uptick when oil price surges and also for its 3.8% dividend yield.
Here are some more stocks that will benefit from COVID-19 vaccine.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. David Gardner owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Bristol Myers Squibb, and Enbridge. The Motley Fool recommends Dominion Energy, Inc.