Sandy: Beware the bubble in storm stocks

The easy money has probably already been made.

By InvestorPlace Nov 2, 2012 1:00PM


Dice on stock listings copyright Kate Kunz, CorbisBy Dan Burrows

Don't get swamped by the bubble in Superstorm 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 -- only to quickly recede once the torrent and trade has passed.

We saw it happen again Wednesday when the market opened after a two-day shutdown. Stocks that should theoretically benefit from demand induced by Sandy saw heavy volume and strong gains in an otherwise flat-to-down session for equities:

  • Home-improvement retailers Home Depot (HD) and Lowe's (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 (BGG) added 3.8%, while Xylem (XYL) and Pentair (PNR) each tacked on 2.8%.
  • Makers of construction materials also got a Sandy boost. Owens Corning (OC), for example, rallied 6.8% in the aftermath of the storm. Granite Construction (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 at or below pre-storm levels.

Unless you are a market timer with an impeccable crystal ball, you're as likely to get hurt by the storm trade as make a profit. Take a look at Briggs & Stratton. It rallied nearly 20% on 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 the fundamentals , the result is a bubble. Don't get caught up in this one.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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