Katrina Plays, Part I
We don’t make the rules; we just try to play by them…
without getting hurt, of course. Therefore, whenever a
disaster strikes, we endeavor, first and foremost, to avoid
numbering among the victims. Next, we remember that
disaster often begets opportunity.
We do not relish the thought that widespread human
suffering often sows the seeds of opportunity, we merely
observe that it is true. Hurricane Katrina has provided a
textbook example of this phenomenon. All last week, while
Katrina was visiting misery on hundreds of thousands of
Gulf Coast residents, she was also lavishing riches on
hundreds of thousands of investors.
Because the massive hurricane destroyed oil platforms in
the Gulf of Mexico, oil service companies like Tidewater
Inc. (NYSE: TDW) will receive new multi-million dollar
Because Katrina flooded 10% of the nation’s refineries, the
non-flooded 90% of the nation’s refineries will receive
much higher prices for the refined products they produce…
Because the hurricane devastated residential and commercial
structures throughout the Gulf Coast region, a purveyor of
construction and repair materials like Hughes Supply will
enjoy a brisk demand for its products.
You get the idea…and so do many other investors, which is
why numerous "Katrina plays" have jumped sharply since the
hurricane struck New Orleans last week.
But event-driven gains in the stock market tend to wither
as quickly as they first appear. After the 9/11 terrorist
attacks, for example, the share price of defense
contractor, EDO Corp., jumped 50% immediately. But the
stock quickly surrendered all of its post-9/11 gains, and
then some. Today, the stock languishes about 10% below its
post-9/11 peak. The shares of Merrimac Industries, a
defense satellite contractor, suffered a similar fate –
soaring 50% in the months immediately following 9/11, only
to swoon shortly thereafter. The stock remains well below
its post-9/11 high.
The trick, therefore, is to distinguish between fleeting
fancies and enduring trends.
So let’s consider for a moment what sorts of companies
might enjoy an enduring benefit from the New Orleans
tragedy. Resource companies of one type or anther would
seem like logical candidates. After all, resource stocks
are already in a bull market. Katrina’s devastation,
therefore, should only serve to increase the demand – and
the price – for things like lumber and steel and copper and
everything else that is required to rebuild the region. But
even this demand will not last forever.
Other short-term beneficiaries might include construction-
supply companies or water-treatment companies or local
homebuilders. Jon D. Markman, publisher of StockTactics
Advisor, goes so far as to suggest a "Rebuilding-Louisiana
But short-term bullish trends excite us much less than
long-term bullish trends. We are more interested in long-
term ideas. We are much more interested identifying
companies that inhabit a changed world, thanks to Katrina.
Perhaps we are expecting too much to believe that one storm
– even a very big storm – could permanently improve the
economic environment for any company…But perhaps not.
When Katrina disabled large swaths of our nation’s oil-
production infrastructure, she also destroyed much of the
nation’s complacency about future energy supplies. We now
realize just how vulnerable we are to supply shocks,
whether by acts of God or by acts of terrorists.
It is now clear to all of us Americans that we live hand-
to-mouth, energy-wise. In the wake of this realization,
Americans may be much more inclined to embrace – or at
least tolerate – nuclear power. Likewise, they may be much
more motivated to secure foreign sources of oil, or to
expedite the construction LNG terminals, or to increase the
production of ethanol.
In short, we expect three kinds of energy companies to
flourish in the post-Katrina world:
1) Those that provide, or help to provide, viable
alternative energy sources – Two examples would be Cameco
(NYSE: CCJ), the uranium miner we mentioned in yesterday’s
and BG Group (NYSE:BG), a play on liquefied natural gas
that Outstanding Investments recommended early last year.
2) Those that facilitate oil and gas exploration – Blue
chip oil-service companies like McDermott International
(NYSE: MDR) and Halliburton (NYSE: HAL) will not likely be
hurting for business.
3) Those that ship oil products from where they are to
where they ain’t – Teekay Shipping (NYSE: TK) and Frontline
Ltd. (NYSE: TK) are two of the world’s largest oil tanker
Undoubtedly, the post-Katrina world will offer many more
investment opportunities of varying duration. That’s why we
dispatched an email yesterday afternoon to many of our
colleagues, asking them to reveal their favorite long-term
We will share some of their responses tomorrow
And the Markets…
WTI NYMEX CRUDE