The Only Way to Trade a Hurricane
Filed under: Investing
By Dan Newman
While you wish for your loved ones and friends on the Eastern Seaboard to stay safe while Hurricane Sandy roars through, you might think there may be an opportunity to make money on such a rare and cataclysmic event. Don't. Trying to base investments on hurricanes is like sailing an inner tube among 20-foot waves: Who knows where you'll end up?
The macro look
Looking at past hurricane trends, the Financial Times points out a study done by RBC Capital on the 2004 and 2005 hurricane seasons. The 2004 season included Ivan, which caused more than $15 billion in damages, and in 2005 was the devastating Katrina, which caused more than $80 billion in damages. Currently, Sandy is estimated to cause anywhere between $10 billion and $88 billion, meaning no one really knows.
In 2004, the deviations from pre-hurricane trends included lower jobless claims, lower consumer confidence, increased industrial production, lower household energy prices, and gas prices that increased by $0.10. In the time after hurricanes in 2005, jobless claims increased, consumer confidence dipped, industrial production fell, household energy prices increased, and gas prices rose by $0.70.
The takeaway from all this data? With the unknowns of Sandy's destruction, it could or could not affect certain economic measures. You're just as likely to flip heads as guess how Sandy will affect the economy.
Still, you might think that companies that make money on generators, home repairs, or new cars could see a boost in sales. Here's a chart that starts in August 2005, the month Katrina hit:
Companies such as Lowe's (NYSE: LOW ) , Home Depot (NYSE: HD ) , and Ford (NYSE: F ) -- which might have seen a pickup in sales as New Orleans and surrounding areas were rebuilt, and flooded cars replaced -- performed worse than the S&P 500 (INDEX: ^GSPC ) over the following year. Meanwhile, insurance giant Berkshire Hathaway (NYSE: BRK-B ) , which might have been slammed by damage claims, beat the S&P over the same time.
The conclusion from the chart: There are plenty of other factors that go into how a company's stock will perform. And, if a stock price has been inflated by expectations of increased revenue from a major storm, it could fall that much further if revenue from rebuilding is never realized.
As the Financial Times writes, "the problem here is that while rebuilding efforts in aggregate can easily become a significant percentage of GDP, the impact is generally spread out over multiple quarters or even years, thereby diminishing the economic impact in the short term." True, as even five years after Katrina, 100,000 fewer people lived in New Orleans than pre-Katrina. While there may be a faster rush to rebuild one of the financial capitals of the world, it's difficult to measure how this could affect any one company's bottom line.
Still an economic force
Power outages, closed stock exchanges, mass transit interruptions, and cancelled flights have definitely disrupted business as usual, but attempting to trade on damage speculation is a losing game. Remember to keep a long-term outlook.
However, if you're intent on trying to make investments based on the weather, there is a long-term play on worse-than-usual storms, as Fool Alyce Lomax explains. Higher sea levels create more destructive storm surges, and higher sea surface temperatures increase rainfall and flooding potential. Companies that are aware of these risks and prepare for these potential changes can come out of disasters ahead of their peers. According to one study, returns from sustainable companies beat unsustainable companies by 4.8 percentage points annually from 1993 to 2010.