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This week Hurricane Sandy made landfall in the northeast U.S. And the historic storm’s impact caused markets to close, and industry and travel came to a screeching halt in the most populated portion of the country. First and foremost, our thoughts and prayers are with those in these areas.
As investors, though, we must also look at events such as Hurricane Sandy from an investment standpoint. You want to recognize any risks to your portfolio, while at the same time identifying opportunities that might emerge in the aftermath of this disaster.
Generally speaking, whenever there is a natural disaster like this many investors’ initial reaction is to sell the insurance companies, specifically property and casualty insurers. The logic is simple: Policyholders are going to submit a ton of claims as the storm passes and the damage is realized. Certainly having to pay all those claims is not good for insurance companies. So stocks of those companies are usually some of the hardest hit.
Airlines are the second group usually hit during this type of disaster. Literally thousands of flights were cancelled as the storm shut down transportation along the mid-Atlantic and Northeast corridor, the most heavily trafficked area of the country for flights. Obviously cancelling those flights is a short-term negative for airline stocks.
The logic behind these two sectors getting hit the hardest after a storm is sound. But as contrarians we have to ask ourselves: Is a storm like Sandy a game changer for these industries, or just a one off, tragic event that has some fast money traders selling positions?
Opportunities Beyond
the Short-Term Negativity
In the case of insurers, certainly those with heavy exposure to the Northeast will take a big hit. But at the same time not every insurance company will suffer a big financial loss. In fact, many insurance companies have financial hedges, like reinsurance, to help soften the blow.
That’s why with insurance companies it’s important to make sure you don’t just paint the entire industry with a wide brush given the damages from the storm. Some relatively unaffected insurance companies will be sold off with the sector, and may provide a good entry point.
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| Cancelled flights this week will only have a short-term effect on airline revenue. |
Turning to airlines …
Cancellations will have a short-term negative effect on revenues and drag the stocks down. But the trend for airlines, which has generally been improving lately, won’t be de-railed by Hurricane Sandy.
As airlines continue to eliminate unprofitable routes and charge for what seems like absolutely everything on board, revenues should continue to climb beyond the scheduling problems associated with the storm. Just like with the property and casualty insurers, look to potentially buy some quality airlines if they are sold off too hard by the market.
Then there is …
A Play on the Long Side
Refineries across the northeast had to reduce or shut down operations due to the storm, which will cut fuel and heating oil output. What’s interesting is that inventories nationally were already 20 percent below last year’s level before the storm hit. So we can expect that an already tightly supplied market will be even more so as we enter the winter months, meaning prices should rise over the coming weeks and months.
One way to play heating oil is via the United States Diesel-Heating Oil Fund (UHN). A word of caution though if you want to buy it: This ETF is very thinly traded, so pick your entry spots carefully.
Best,
Tom
