How Investors Can Make an Impact After a Disaster

| October 15, 2017

When a natural disaster strikes, the first reaction of the business community is compassion. Many are the stories of good Samaritan companies opening their doors, lending equipment for rescue and relief, and helping to facilitate the rebuilding and restocking needed in their own neighborhoods. That’s what happens on the ground. But a business’ second reaction to a natural disaster is usually more interesting from an investor’s standpoint. While any business disruption means a short-term dip in a region’s economy, there’s also an opportunity created for surviving businesses and investors. We’re not talking profiteering, a morally reprehensible act of taking advantage of people in desperate circumstances by raising the price of food, water, gasoline, and other essentials. And we’re not talking about donations to charities that provide humanitarian aid, which is a short-term gesture in dire circumstances.

No, this reaction is insightful and long-term, forecasting a region’s market needs going forward. By thinking of what will be crucial to an area seeking to rebuild in the aftermath of a natural disaster, investors can strengthen the companies that will do the heavy lifting involved in the recovery while making themselves a strong return on investment.

COSTS ARE ESTIMATED

The first thing to understand about this strategy is that estimates of how much any storm will “cost” is typically a large number that is wildly overstated. Yes, any economy is affected by severe storms – customers can’t get to stores, retailers are closed, supplies can’t be procured, employees can’t make it to work, many wage-earners are not paid for that time off, taxable revenue drops, and businesses that subsist on servicing those absent employees lose revenue.

The New York Times reported that Hurricane Harvey, which devastated the southeast coast of Texas and parts of Louisiana, could cost $70 billion to $108 billion. The paper looked at data from the National Centers for Environmental Information, which was estimated to cost about $160 billion in today’s dollars, by the estimates of the National Oceanic and Atmospheric Administration (NOAA).

But remember that the US economy is measured in trillions, with a “T.” Even damage estimates from Harvey  – which was truly devastating to hundreds of thousands of people – are really just equal to a very small blip in the overall economy. Also keep in mind that these are estimates, not a line-by-line accounting of losses, which are impossible to determine. Yes, when a region is hit hard by a storm, statistics show an economy will crater for a short period of time. It’s what happens next that tells the real story.

Wise investors know that many “losses” are often made up on other days, some near-term, others taking place a year or more into the future. That’s where savvy investors can see an opportunity by betting on the businesses and consumers that stay in the area. Rebuilding is a giant task, but as history has shown, it’s one eagerly embraced by people who love their cities and states and wish to stay there.

THE PROFITS FORECAST

Here are some ways to look at the emerging landscape following any storm:

1)  RETAIL LOSSES – We’ve all seen pictures of store shelves that are picked clean of perishables and other items before a major storm hits. We also know that no one goes out for dinner in a snow storm or hurricane. But after the storm, those shelves are restocked, people want to get out of the house, and things that were forsworn during the disaster – movie-going, clothes shopping, dining out – may experience a boom period.  Options investing is a good way to play that market. Things like protective puts (where a possible selling price is established) or covered write (a timed investment that offers a premium) can offer investors who understand how storms affect businesses a way to squeeze some profits out of the situations.

2)  INSURANCE COMPANIES – The aftermath of extreme weather often makes people think about the next time. Thus, people begin planning and often boost the price of valuable tools like insurance.

3)  PREVENTION AND INNOVATION – Nothing fires up the entrepreneurial imagination more than coming up with a solution to a mass-market need.  Investors may consider what is needed during a storm and look toward companies that offer solutions to mitigate damages in the future. The prepper market became a billion dollar business based on this phenomenon.

4)  GOVERNMENT AID – What areas are going to get an infusion of federal money?  That means jobs, and the ancillary businesses that serve those areas will also benefit from rebuilding. In the early days of a disaster, it’s a good idea to look forward into the future and figure out what will be needed to get things back to normal. The companies that provide those services are good places to consider for investment.

5)  DISLOCATION – After Hurricane Katrina, a large part of New Orleans was rendered uninhabitable. Thousands of evacuees took up residence in nearby Baton Rouge and Houston, where housing, household supplies, and federal disaster relief money was needed. Investors who saw that opportunity capitalized.

The United States is in a period where large and devastating storms are becoming more common. The New York Times reported that in inflation-adjusted terms, the US averaged fewer than three billion dollar natural disasters per year from 1980 to 1990. However, since 2010, it has averaged more than 10 per year.

If you’re an investor that believes the trend will continue, it’s wise to start thinking now about ways you can make an impact going forward. History is a great teacher, particularly when it comes to human resilience. By placing the right bets, you can help your fellow citizens in their quest to return to normal and feel good about how your money is being used.