Similar to investing in “Sin Stocks,” i.e., alcohol, tobacco, casino, weapons companies, investing with the mindset of making money before or after a natural disaster, such as a hurricane like Harvey that hit Texas a few weeks ago is often a touchy subject.
By Matt Thalman
But, if you are someone who is alright with investing in this ‘morally gray’ area, or just want to learn about how others pursue it, together we can take a look at how it is accomplished and a few things to be aware of before deploying capital.
First, while every natural disaster can be incredibly devastating, hurricanes typically seem to account for the bulk of the damage here in the US. In most cases, they are the only real disasters which you can invest around because of their predictability, which gives investors a chance to make investments both before and after the disaster occurs.
Since hurricanes occur along the coast, and more often in the gulf coast region, the one industry they seem to affect is the oil industry. This is because a significant amount of oil is drilled for in the Gulf of Mexico and because a large number of the US’s oil (NYSEARCA:USO) refineries and oil shipping ports are found in this region.
Not only is the price of oil affected by these natural disasters, but oil companies, exploration, production, the refinery’s, and even oil transportation companies themselves can be negatively impacted by these events if their operations are put on hold due to a storm. Furthermore, the oil company equipment suppliers can be affected by these storms if the equipment is damaged and needs to be replaced. (This can be both good and bad, for example, someone like Haliburton who sells equipment will make more money if the equipment is damaged, but a company that rents oil and gas equipment would be negatively affected by a hurricane because it may need to replace items.)
So buying or selling an oil industry Exchange Traded Fund, such as the SPDR S&P Oil & Gas Exploration & Production ETF (PACF:XOP) or the SPDR S&P Oil & Gas Equipment & Services ETF (PACF:XES) or the border First Trust NASDAQ Oil & Gas ETF (NASDAQ:FTXN), before or after a hurricane would be one way to play the disaster.
Another way to do it would be looking at the industries which will take on damage or could profit from the damage. Cars are often destroyed in mass when a hurricane rolls in due to the flooding. Car makers may see a boost in sales following a hurricane event, while car dealerships such as Auto Nation or Carmax may see inventories destroyed and or car parts retailers like AutoZone and Auto Parts because there will be more new cars on the road thus fewer parts breaking that need to be replaced. One automotive industry ETF is the First Trust Nasdaq Global Auto Index Fund ETF (NASDAQ:CARZ).
Obviously, the car insurance companies would take a hit from these events also, which is no different than those insurers who cover homes and businesses. So you could try to short the SPDR S&P Insurance ETF (PACF:KIE) prior to the storm and then keep an eye on it and go long the KIE when the big insurance companies start announcing rate increases (which would be a catalyst to move their stocks higher, if another big disaster is avoided in the near term.)
Another area that would be worth looking into, the home builders or anyone involved in repairing homes and buildings; i.e., Home Depot or Lowe’s. Furthermore, the raw industrial materials companies could also benefit since need wood, metal; stone would all be needed to repair homes, other buildings, and general infrastructure. So buying something like the Vanguard Materials ETF (PACF:VAW) would give you exposure to some of the materials needed to rebuild.
And finally, when an event such as this takes place, we often see the national Gross Domestic Product fall during the quarter in which the event took place. In the past, these events have caused GDP to fall to on average 0.1% for that quarter, but we often see it rise to an average 2.8% the following quarter as rebuilding begins.
This could offer a potential opportunity to short stocks during the time around the event since general spending has been reduced and then go long stocks a few months later when the mess has been cleaned, and spending begins to rebuild the affected areas. This strategy could be accomplished by simply by shorting the S&P 500 with something like the ProShares Short S&P 500 ETF (PACF:SH) before the event and then through buying the SPDR S&P 500 ETF (PACF:SPY) to go long after the disaster causes equities to fall.
Lastly, if this is an investment strategy you want to pursue, I would urge you to diversify your holdings before and after the crisis. Just because you may think one thing may happen, doesn’t mean it will. For example, you may think oil prices will go higher, but there is no guarantee they will. Before Harvey, that is what everyone thought, but the US government stepped in and started selling its reserves, which helped keep prices relatively in-line to where they were before the storm hit.
So just make sure you understand there are no guarantee’s in investing, and you may want to hedge your bets because the same way nature is unpredictable, well so are the markets, and you may also not be able to handle its destruction.