Don’t get swamped by the bubble in Hurricane Sandy stocks.
Every time there’s a massive storm somewhere in the U.S., the usual suspects, from home-improvement retailers to pump manufacturers, rally on the disaster — only to quickly recede and then some once the torrent and trade has passed.
We saw it happen again Wednesday after the market opened after a two-day shutdown because of the storm. Stocks that should theoretically benefit from demand induced by Hurricane Sandy saw heavy volume and strong gains in an otherwise flat-to-down session for equities:
- Home-improvement retailers Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) jumped 2.2% and 3.3%, respectively.
- Companies that make industrial pumping equipment of the sort needed to dry out New York and New Jersey likewise had a good day. Briggs & Stratton (NYSE:BGG) added 3.8%, while Xylem (NYSE:XYL) and Pentair (NYSE:PNR) each tacked on 2.8%.
- And, of course, makers of construction materials got a Hurricane Sandy boost, too. Owens Corning (NYSE:OC), for example, rallied 6.8% in the aftermath of the storm. Granite Construction (NYSE:GVA) rose 2.5%.
But investors would be unwise to pour into these stocks. The easy gains have probably already been made. And even if there’s more upside ahead, the stocks will almost certainly come crashing back and overshoot to the downside in the days and weeks ahead.
That’s what happened with Hurricane Katrina in 2005 and Hurricane Irene in 2011, anyway. The “storm stocks” shot up 5% to 10% or more. But as little as a month later, most were back to pre-storm peaks or even trading below their pre-crisis levels.
Unless you are a market timer with an impeccable crystal ball (you’re not), you’re as likely to get hurt by the hurricane trade as make a profit. Take a look at Briggs & Stratton. It rallied nearly 20% on anticipation and then landfall of Hurricane Irene. A month later, BGG had suffered a full-blown 20% correction from its storm peak.
The hurricane trade is simply too obvious to make a killing on. When everyone is pursuing the same idea with access to the exact same information, well, who exactly is taking the other side of that bet?
Smarter and bigger money than you, most likely.
Furthermore, stocks ultimately trade on quarters and quarters of future earnings. The short-term jump in sales might make for one better-than-expected period of results, but that’s a one-time boost, not a sustainable, long-term trend.
And, perhaps most important, as Brian Sozzi, chief equities analyst at NBG Productions & portfolio manager for Decoding Wall St., wrote ahead of the storm, folks always overestimate the benefit these events have for companies’ bottom lines.
“I have never been a fan of investing in ‘storm stocks’ in the lead up to the actual storm, or in the immediate aftermath,” Sozzi wrote in a Monday note to clients. “The market feasts on the enthusiasm but then any gains are given back once math is done that the actual impact to sales (less so earnings as storm precaution items are usually low margin commodity type goods) will be muted.”
When everyone chases the same trade regardless of whether the fundamentals support the prices? Hey, that’s a great way to get a bubble. Don’t ride this wave.
As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.