and the mis-pricing of insurance stocks
In the coming days and weeks, there'll likely be an opportunity to cash in on some misunderstanding in the stock market. As Hurricanes Frances and Ivan blow their way across the southern costal areas, some investors will turn on-line or to their stock brokers and say - "I own Acme Insurance - sell it all! I heard the total devastation is going to be in excess of $10, $20, $30 Billion. Sell my stock.
Now, in some cases, this might be the right move - but in many cases, these investors are simply acting on their own fear and ignorance. They own an insurance company (never mind they don't do house insurance) - and the investor thinks they have exposure to hurricane problem - and, without further investigation - they sell.
This creates a down-draft in the prices of many insurance stocks. Including companies that have no exposure to either house insurance - or more specifically to the Florida area. These stocks fall in price as investors misunderstand their holdings.
However, many insurance companies will be the beneficiaries of Frances, et.al. For instance, Acme Car Insurance company, will be affected by Widget Insurance Company's (who insure both autos nationwide, and houses in Florida) efforts to raise their premiums - across all the lines of insurance that they carry (since Widget will have many millions of dollars in hurricane-related claims to pay). Acme Car Insurance company will thus be able to raise its auto insurance prices since many of its more broadly-based competitors will be forced to - thus increasing Acme's profitability in the coming quarters, and perhaps for a couple of years. Thus providing a nice tailwind for Acme.
A smart investor will be able to profit from both the stock price that almost invariably will rebound as investors realize that Acme isn't exposed to the hurricane calamities, and as the price secondarily increases based on the increasing profitability of Acme over the coming quarters.
Widget suffers, Acme benefits. It's an ill-wind that blows nobody good.
JW
All corporate names are ficticious - any resemblance to corporations, living or dead, is entirely coincidential.
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