While people in New York and the rest of the U.S. East Coast on Friday were buying batteries and water ahead of Hurricane Irene, some investors were more focused on placing their bets just in case this really is “the big one.”
Insurance, construction, and home improvement are sectors that may find investors on either the long or short side as Hurricane Irene arrived this weekend.
Part of the positioning is to protect wealth while some investors place grimmer bets that this storm could cause billions of dollars in property and infrastructure damage.
Late Friday, one bleary-eyed senior trader at a proprietary trading firm in New York, already tired out after weeks of extreme volatility in markets, eyed satellite images of the impending hurricane with an air of disbelief.
“I haven’t seen it all but I’ve come pretty close to seeing it all,” he said. “I can’t remember a time when I’ve seen so much going on … everyone who is managing money has some kind of contingency plan.”
Fifty-five million people are potentially in Hurricane Irene’s path, from the Carolinas to Cape Cod on the U.S. East Coast. Tens of thousands were evacuating as cities including New York and Washington braced for the powerful storm to hit.
One of the odder value plays may be insurance companies. They historically sell off into severe weather events then rally as storms pass and expectations grow that pricing power will improve for those companies.
Shares of insurers, such as Allstate Insurance Co. and The Chubb Corp., slipped on Thursday, and could present an opportunity for exchange-traded fund investors, said Todd Rosenbluth, an analyst with Standard & Poor’s equity research division.
“Even if nothing happens, people are thinking more about protecting themselves from the next big weather-related event,” Rosenbluth said.
The largest insurance ETF is the $155.5 million SPDR KBW Insurance ETF.
Investors who are willing to pay a little more for a “quasi-active ETF, should look at the PowerShares Dynamic Insurance ETF,” said John Spence, Web editor at ETF Trends, an ETF research site.
“PIC gives you a bit of a chance at outperformance with its quasi-active management,” Spence said. However, the ETF has an expense ratio of 0.63 percent, compared to KIC, which costs 0.35 percent, according to Morningstar Inc.
A construction ETF worth considering in light of the hurricane are the Industrials Select Sector SPDR, which is diversified but does have top holdings in Caterpillar Inc. and Cummins Inc., Rosenbluth said.
Investors looking for a more concentrated construction ETF can buy the $57.8 million First Trust ISE Global Engineering & Construction Index ETF, he said. “It’s a relatively small ETF, but it has 85 percent in construction and engineering.
After Hurricane Katrina, the industrials sector did very well, and that could be another good play right now, said Robert Goldsborough, an ETF analyst at Morningstar.
The iShares Dow Jones US Industrial ETF, the Industrial Select Sector SPDR are two examples of ETFs in this sector.
For doomsayers who don’t believe the National Weather Service’s predictions that there is only a small chance New York City may get a direct hit by the hurricane, shorting financial ETFs may be a good short-term play, Goldsborough said.
“If New York City is paralyzed, so too would be the entire financial services industry,” he said.
Some smaller cap stocks may be well-positioned to take advantage of any storm preparation techniques as well as rebuilding efforts in the aftermath.
“You could probably get some benefit to the building product companies, the retailers or roofing related companies — some lumber companies,” said Will Nasgovitz, co-manager of the Heartland Select Value Fund in Milwaukee, Wisconsin.
Beacon Roofing Supply Inc, which distributes roofing materials such as shingles, has risen for five consecutive sessions, rising more than 20 percent on the week.
“Beacon probably would (benefit) if it got severe enough from the winds, they’ve typically benefited in the past. But a lot just depends on how hard it hits and how high the winds are,” said Edward Hemmelgarn, chief investment officer of Shaker Investments in Cleveland.
Another possible beneficiary is Quanex Corp., which provides window and door components. Shares rose 8.6 percent to $11.58 Friday after the company posted third-quarter results.
Midcap battery maker Energizer Holdings Inc. saw its shares jump nearly 15 percent for the week, its biggest weekly advance in a year.
(Reporting by Jessica Toonkel; additional reporting by Edward Krudy and Chuck Mikolajczak; Editing by Andrew Hay.)