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  1. Home
  2. / Investing

Resist the Urge to 'Play' the Hurricane

Not only is it bad karma, but it's almost certain not to work.
By TIM MELVIN Oct 29, 2012 | 11:45 AM EDT
Stocks quotes in this article: HD, LOW, GNRC

For those not directly dealing with Hurricane Sandy, today's discussion will be all about trading the event and finding stocks that benefit from the storm. The obvious ones will be stores such as Home Depot (HD) and Lowe's (LOW), which have seen a surge of last-minute buying in the Northeast. Generac (GNRC), as the best pure play on generators, is going to get a boost as well.

We will hear all sorts of interesting ideas on how to benefit from the storm and the aftermath. But I have seen this type of speculation before, as I have been trading for decades now -- and I have some advice for you: Don't do it. In addition to it being bad karma, it probably won't work.

Folks with fairly sophisticated trading models have had the short-term hurricane-stock surge in their models since two weeks ago. They will be selling the stuff to you and taking advantage of your excitement to calmly book their gains. Less sophisticated investors will temporarily bid up the storm stocks to the short-term stupid level, and the same larger traders will now start shorting the stock in order to take advantage of the psychological dislocation in prices.

But, in the long run, nothing about this storm is going to change the value of any of these companies. A one-time bump in sales at the home improvement retailers does not add billions to the value of Home Depot. Generac will see a run, but all of the generators sold this quarter will just bring forrward demand, for the most part. It will also clear out supply for a few weeks, so sales next month should slump as quickly as they've jumped in the last week. Sandy is a one-off event for these companies, and it is not going add any permanent value.

It does not do much for the economy in the long run, either. As Frédéric Bastiat pointed out to us back in 1850, running around fixing broken windows is not a solid plan for economic growth. Money spent to repair storm damage and replace lost items is money that's not being spent somewhere else. Every dollar received from an insurance company comes out of the profit column and means less investment by the insurance industry. As far as the economy is concerned, in the long run these are zero-sum events that change nothing for the better. Should any damage cause companies to shutter and induce long-term loss of jobs, that could be a long-term negative -- but no economic good will come from the storm.

Resist the urge to "play" the event. The chance to profit from it is long gone. If damage is severe enough, you may see eventual long-term bargains created in insurance stocks -- but, as far as this is concerned, it would be best to wait and react to the aftermath. Trying to predict winners from one-off events is a losers' game.

Stay safe.

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At the time of publication, Melvin had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity

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