Every time a huge weather system affects large parts of the country, investors hunt for related profit opportunities – and in the case of Sandy, that means "hurricane investing."
With airline flights being cancelled across the country and businesses closing down due to Hurricane Sandy, the short-term economic impact is immediately obvious. Estimates for the total costs of the storm damage range up to $20 billion, with New York and New Jersey absorbing the bulk.
As a result, the traditional sector groups will be immediately punished: insurers, airlines, retailers and refiners. Insurers are expecting losses of up to $5 billion due to the damage to automobiles, homes and businesses on the East Coast.
But even with this estimate, it is not so clear if there are any surefire investment opportunities resulting from Hurricane Sandy.
That's why Money Morning Chief Investment Strategist Keith Fitz-Gerald explained yesterday it's often best to let go of those opportunities, and remain focused on your long-term investment goals.
"Companies like Home Depot (NYSE: HD) (roofing and materials), Chubb (NYSE: CB) (insurance) and various refineries get plastered all over the news with increasingly frequency as whatever calamity approaches," Fitz-Gerald explained. "Most turn out to be incredible and expensive busts for investors because storms like Sandy prove to be short-term events that tend to have very little impact on longer-term performance."
Hurricane Investing: The Biggest Players
Those who will try to find hurricane investing opportunities will focus on insurance companies.
Last year, insurers in the United States covered $32 billion in damages. So far for 2012, total claims have been about $16 billion. Hurricane Sandy will increase that amount substantially.
The last major hurricane, Irene, caused $4.3 billion in insured damage. The uninsured damage will be more than twice that amount.
For Hurricane Sandy it is likely to be much higher as it has hit squarely in the concentrated area for property damage, the seven boroughs that constitute New York City.
Retail stores will suffer heavy losses too, particularly for peak holiday shopping for Halloween, Thanksgiving and Christmas. Halloween by itself is estimated to add $10 billion to gross domestic product.
Retails can suffer actual damage to the physical stores and inventory. That can be replaced or covered by insurance. What cannot be replaced is the customer who will go elsewhere and never return.
On the other hand, companies that stand to benefit – and be targeted for hurricane investing – will be those involved in the repair efforts, such as Home Depot and Lowes Companies Inc. (NYSE: LOW). These home improvement stores will register higher sales as repair work will require more lumber, drywall, paint, and more.
Why to Avoid Hurricane Investing
Despite these estimates of the likely effects on businesses, Fitz-Gerald explains it's best to avoid the hurricane investing temptation.
"What I want to point out is that it's far better to leave storm-driven trading to nimble and well capitalized traders whose job it is to specifically assess and profit from risks that have no place in an investor's portfolio," said Fitz-Gerald. "Storms like Sandy come and go with spectacularly unfortunate regularity in the longer-term scheme of things. That's why we don't want to confuse the ability to take risk with the ability to absorb risk. It makes no sense to try and outwit Mother Nature when we have far bigger things to worry about – like structuring our portfolio for maximum defense and growth during some of the most challenging economic times ever recorded. And, of course, wishing that those in harm's way survive the experience with minimal impact on their lives and those of their loved ones."
To find out how to get more updates from Keith Fitz-Gerald, and review a recent report from him and a team of researchers, click here.
[Editor's Note: Money Morning Chief Investment Strategist Keith Fitz-Gerald has spent decades studying Asian markets and spends months of the year in Japan. Check out his recent analysis on what to expect from Japanese stocks due to the country's troubled trade relationship with China.]
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