Don’t Rush To Buy “Sandy Stocks”

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The media is in love with action. Anything that is out of the ordinary is given a warm embrace and is promoted to become the “event of the day.” “Sandy”, the terrible storm that shook America a week ago, most definitely deserved its place in the news: It has taken the lives of many people and caused massive destruction that is estimated at around $60B. But, what are the financial implications of this storm?

“Sandy” stock picks

The financial media was quick to take advantage of this storm and translate it into potential gains by recommending a vast array of stocks that are bound to benefit, one way or another, from the storm. Here are three stock picks that were highly recommended by the financial media to the crowds, and the underlying rational behind each stock pick.

1. Home Depot (NYSE: HD): This company is a classic home improvement retailer. It sells building materials to constructors and individuals, as well as batteries and other necessary equipment to weather a massive storm. Home Depot is likely to benefit from the massive construction to take place in the U.S in the aftermath of the storm

2. Waste Management (NYSE: WM). “Sandy” has created tons of waste and debris that someone has to clean. This someone could very well be Waste Management whose core business is to provide collection, recycling and disposal services to residential and commercial customers

3. Pentair (NYSE: PNR). This company delivers products, services and solutions for water and other fluids. Since the U.S is now in need of drain and sewage solutions, this could become a great match.

How to lose money quickly

It has been my experience that event-driven investing is a losing business. Put simply, if you base your investing decisions solely on a single event, as meaningful as it may be, you are likely to lose money. There are a few reasons to why event-driven investing is a losing pursuit:

1. It is on the verge of impossible to predict the financial impact of a single event on the economics of an individual company. Even if you believe you know the general direction, it is extremely difficult to guess correctly which are the companies most likely to benefit from this event, and how. 

2. You are probably too late to the party. By the time the storm has ceased and the “financial experts” have published their winning picks, the big money has already moved in. Hence, you are likely to pay much higher prices than the first ones who have already made their move. The famous paraphrase for this phenomena is “Buy the rumor, sell the news”. The rationale behind this is that by the time something becomes public news, everyone and his brother have already piled in and there is no one left to buy, but you.

The Foolish bottom line

Having said that, many of the companies mentioned in the financial media as ‘Sandy winners” could actually become just that. My main point is to stress out the importance of conducting a proper due diligence on a company prior to making any investment. In other words, if a company did not deserve your hard- earned money before the storm, there is no reason why it should deserve it after the storm.

shmulikarpf has no positions in the stocks mentioned above. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services recommend The Home Depot and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus