The Anti-Hurricane Play

As potential hurricane plays in the oil and gas sector have been readily discussed, I thought it appropriate to take a look at the other side of the coin. What sectors should be considered should the Weather Gods show mercy on the Gulf Coast this upcoming season tropically-speaking? Additionally, merely discussing the lack of storms may get Mother Nature to show her passive-aggressive tendencies and get things going, just to be contrary. Thus, in an effort to jinx the hurricane season into activity, here is a list and discussion of sectors to investigate should the coast not get smited…or smitten.

1. Insurers

Insurers are perhaps the most obvious play here. If there are no hurricanes, insurers continue to collect premiums without having to pay out damages. No news is good news when it comes to insurance. I have listed three different insurance plays, from large cap to small cap.

i. Allstate Insurance Corp. (ALL)

Allstate is the largest publicly-traded personnel insurer in the United States. Despite its size, it still has considerable exposure to the Gulf Coast, putting its profits at risk in the event of a strong landfalling hurricane. During the 2004 hurricane season in which Charley, Ivan, and Jeanne all made landfall as Major Hurricanes, Allstate reported losses from these storms of over $1.11 Billion. In 2005, losses from Dennis, Katrina, and Rita exceeded $3.0 Billion.

ii. Renaissance Re-insurance (RNR)

Formed in 1993 as a result of Hurricane Andrew, Bermuda-based Rennaissance provides property-catastrophe re-insurance and primary insurance. Along with subsidiaries Timicuan Reinsurance II and Glencoe Insurance, Renaissance operates in several hurricane-prone regions including Florida, Texas, North Carolina, and the U.S. Virgin Islands.

I like the technical breakout above $50.

iii. Universal Insurance Holdings (UVE)

Hat-tip to Hooper for this one. Universal Insurance Holdings is a Ft. Lauderdale-based company providing home-owners insurance against hurricane damage to customers in North Carolina, Georgia, and Florida. It boasts 360,000 clients in the state of Florida alone. While it trades on thin volume with a market cap of just $190 Million, UVE is probably the purest anti-hurricane play of the three. Definitely a speculative position.

2. Irrigators

While the cons of hurricanes are well-documented, hurricanes due have their benefits. Much of the southeast and south-central United States derives a large portion of their summer rainfall from tropical cyclones and their remnant moisture. This is particularly true for areas that don’t see afternoon convective thunderstorms, such as South Texas, the southern Great Plains, and the Appalachians.

The absence of hurricanes and tropical moisture can quickly result in drought conditions during the summer months. In 2009, Texas and Louisiana are already experiencing moderate to exceptional drought conditions. Coupled with the rapid rate of evapotranspiration during the hot summer months, this drought could easily spread to encompass much of the Southeast should no tropical cyclones impact the region. The upper midwest and west coast are also experiencing short-term moderate droughts. The current drought status is shown below in Figure 1.

Figure 1: Current drought status shwoing exceptional drought in south Texas and moderate drought in other areas of the Southeast.

Companies that may benefit from these droughts are irrigators that sell agricultural machinery to efficiently water cropland with minimal waste. Two of the most prominent companies in this sector are Lindsay Corp (LNN) and Valmont Industries (VMI)

i. Lindsay Corp (LNN)

Lindsay Corp is a designer and manufacturer of self-propelled center pivot and lateral move irrigation systems. These are relatively easy to set up and move quickly as conditions warrant. Thus, they make a great drought-play. I will likely initiate a starter position in LNN at some point this week, on anticipation of a break above $40, at which point I will add to the position.

ii. Valmont Industries (VMI)

Valmont is a manufacturer of fabricated metal products. Its mechanized irrigation equipment delivers water, chemical fertilizers and pesticides to agricultural crops. Because of its large construction business, Valmont is a more diversified play, with significant exposure to the broad construction industry in addition to irrigation.  Valmont reported 2Q earnings of $1.69/share last week, up from $1.41/share from a year ago. Since the announcement, the stock has fallen from over $81 to $71.

3. Misc. Oil and Gas

While oil and gas plays are usually considered bullish hurricane plays as the underlying commodity prices often see a jump ahead of the storm. However, certain companies often have interests in the Gulf that are adversely affected. I provide just one here, Anadarko (APC).

i. Anadarko Petroleum Corp. (APC)

Anadarko operates the Indepedance Hub, an oil and gas producing and holding facility located in the deep-waters of the Gulf of Mexico. It is located roughly 100 miles south of Plaquemines Parish in Louisiana in a very vulnerable location. The facility produces and/or handles 7.4 BCF/day of natural gas, more 10% of the nation’s gas demand and is one of the primary income generators for Anadarko. While shut-ins may reduce the NG supply and increase prices, it is bad in the long term for a company like APC that holds interests in the oil and gas infrastructure in the region. While the platform has been relatively lucky thus far in avoiding hurricane damage, it did lose 5 Million Barrels of oil last summer due to Ike and Gustav.

While this is a play on fundamentals, a breakout above $52 would be attractive.

Note: Major Karma Points to the first person to correctly identify the hurricane shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

Wabisabi retakes the lead after getting the last storm in under 10 minutes…

1. Wabisabi-6

2. DPeezy-5

3. Yogi and Boo Boo-2

If you enjoy the content at iBankCoin, please follow us on Twitter