Profiting from Disasters

September 2011

Sidney M. Wolfe, M.D.

Last month’s hurricane reminded me of an article I read in the April 12, 2010, Wall Street Journal entitled “Profiting From Disasters: Afraid of a Hurricane? Pandemic? Global Warming? Consider These Stocks.”

One common game played by Wall Street is referred to as short-selling and is a specialty of many hedge funds. This activity makes money because stocks decrease in value. The gist of short-selling is knowing (or guessing) in advance that a stock will lose a significant amount of value and betting that this will occur. When you short-sell a stock, your broker will lend it to you. The broker then sells “your” borrowed shares and the proceeds are credited to your account. Sooner or later, you must “close” the short by buying back the same number of shares and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference.

In contrast, The Wall Street Journal article discussed why it is a good idea to hold stocks that are likely to increase in value in the face of various disasters. The theme is that “the best way to guard against each of these fears is to insulate your portfolio with stocks that have the tendency to go up when that particular fear rears its ugly head.”

The article’s author, James Altucher, reviewed information from the 10 most expensive hurricanes in the U.S. and found that three stocks increased in value following the storms: Campbell Soup Co., Nucor Corp. (manufacturer of steel used in bridge and building repair) and Hill-Rom Holdings Inc. (manufacturer of hospital beds and medical equipment).

What about profiting from pandemics, worldwide epidemics of infectious diseases? Altucher noted that every year the strain of flu virus changes and vaccines created the previous year to combat the virus can be ineffective. Should a more serious pandemic arise, stocks that would possibly profit include GlaxoSmithKline, the largest manufacturer of flu vaccines, as well as Sanofi-Aventis. Another company that could profit from such an outbreak is Alpha Pro Tech, maker of masks that protect against airborne contagions.

In the interest of full disclosure, Altucher reveals that he is a managing partner of Formula Capital, an alternative asset-management firm, and that he may have positions in the stocks listed in his columns.

It is unfortunate that while citizens who may be adversely affected by an impending disaster are taking steps to prepare to cope with the aftermath or to get out of harm’s way, some hedge fund managers and financial analysts are looking for a way to make a quick buck.