Event-Driven Investment & Trading Opportunities: Profiting from Pandemics, Recessions, Wars, Natural Disasters, Politics, & Other Events.
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1. Pandemics2. Recessions3. Wars, International Conflicts, & Cyber Attacks4. Natural Disasters5. Politics & Unrest
- Gold: On February 20th, when the markets began to tank and uncertainty hit, many investors went for the classic comfort zone; Gold. Initially as the market dipped Gold ETF’s, Indexes, & mining companies enjoyed an spike in price action. However they too soon succumbed to selling pressure. Nevertheless, most reliable Gold ETN’s, indexes, and mining companies were beating the S&P by mid April, and by late April they enjoyed a profit over their pre-pandemic highs. The graphic below compares SPY to the Spider Gold Trust Index (GLD), Barrick Gold (GOLD), VanEck Vectors Gold Miners ETF (GDX), VanEck Vectors Junior Gold Miners ETF (GDXJ), and Yamana Gold (AUY). GLD (Commodity Index ETF) proved to be the best protection from market selling forces while GOLD (Mining Company) proved to have the best recovery and profit by the 1st of June. The ETF’s made of a basket of gold mining companies preformed the worst out of this group of five tickers, but still realized a profit over the pre-pandemic plunge.
- Volatility: Those who had the foresight to bet on volatility as the market plummeted on February 20th saw returns as high as 450%! Traders of the CBOE Volatility Index (VIX) enjoyed up to 450% gains from February 20th to March 16th before tapering off slowly. Traders of the ProShares VIX Short-Term Futures ETF (VIXY) enjoyed up to a 400% increase from February 20th to March 18th. Finally, traders of the Proshares VIX Mid-Term Futures ETF (VIXM) enjoyed up to a 130% increase from February 20th to March 18th. And all while SPY was diving. Generally uncertainty breeds losses and volatility. And those who traded on VIX futures made a killing on the SPY pandemic drawback.
- Clorox (CLX): One of the more obvious plays to trade the COVID-19 pandemic was Clorox. From February 20th til the market low on March 23rd CLX jumped 3%. By June 1st CLX enjoyed a 24% gain.
- Work from Home Companies: Amid a nationwide quarantine, companies that enabled people to work remotely saw increased demand. Zoom (ZM) afforded businesses, governments, schools, and military to hold meetings and undertake online group projects. Docusign (DOCU) enabled workers to electronically sign documents on different devises, and had enough encryption to amount to a legal signature. Dropbox (DBX) afforded schools and businesses to transfer documents on common projects where it was necessary for multiple people to access the same work product. Slack Technologies (WORK) enabled businesses not only to send their employees home to work, but to also maintain supervision on workers as they work at home. When SPY was at down 33% on March 23rd, traders of ZM, DOCU, DBX, and WORK enjoyed a 54%, -8%, -6%, and -10%, respectively. By June 1st these securities were up about 97%, 60%, 36%, and 28%, respectively.
- Masks & Protective Wear: One of the most lucrative investments during the early stages of the COVID-19 pandemic were some of the smaller companies that manufactured protective masks. The shortage of protective wear became apparent very early on and the U.S. Government began putting in orders for masks from wherever they could find them. Protective masks enjoyed strong international demand as well. As traders and investors we must take into account that the U.S. Government will likely be better prepared the next pandemic, however we can be somewhat certain that protective mask manufacturers will enjoy some increased demand all the same. Nevertheless it must be observed that companies like 3M (MMM) did not enjoy the boost that some of the smaller companies received. In fact, as of June 1st 3M is barely in the positive since the February 20th drop. The three companies indicated on the chart below are Lakeland Industries (LAKE), Allied Healthcare Products Inc. (AHPI), & Alpha Pro Tech (APT). The gains enjoyed by these companies amid the COVID-19 pandemic in most part due to n95 masks is nothing short of amazing.
- Vaccines: There is no cure for a virus, though immunity to a virus can be boosted. That’s why we get our flu shots annually and why we vaccinate our children from antiquated but historically deadly viruses. It should therefore come as no surprise that with a new deadly virus, shareholders are going to speculate on the companies working on a new vaccine. And as demonstrated on the chart below, companies researching and testing for a possible vaccine are enjoying a major boost in shareholder attention. As COVID-19 is not likely going to go away any time soon, the company that develops the vaccine will likely enjoy profitability for years to come. Here we examine a few of the more popular vaccine companies, but this list is far from complete. The returns as enjoyed by the shareholders of Novavax (NVAX), Inovio (INO), Moderna (MDRA), and Gilead (GILD) are, much like the masks and protective wear companies, amazing.
- Airlines: When it became apparent that a highly contagious virus was spreading across China the Trump Administration locked down travel to the United States. While this may have slowed the spread of COVID-19, it proved to be but a temporary solution. Soon after more and more travel bans were implemented to include the European Union. Additionally U.S. Government employees and military personnel were prevented from non-mission essential travel. Moreover, U.S. citizens and U.S. businesses opted to forgo many of their travel plans. As a result airline securities collapsed and the airlines became a distressed industry. By June 1st, four of the most popular airlines are still significantly down since the February 20th dip. Depicted below are American Airlines (AAL), Southwest Airlines, (LUV), United Airlines (UAL), and Delta Airlines (DAL). Note that Southwest is enjoying less pain as the company is known to be the most financially solvent. Nevertheless airlines amid a serious pandemic presents a seriously lucrative shorting opportunity.
- Car Rentals: Another example of the toll COVID-19 on the travel industry is the car rental industry. With less people travelling it stands to obvious reason that there will be decreased demand for car rentals. The worst by far was Hertz (HTZ) who, as a result of the decreased demand, filed for chapter 11 bankruptcy on May 22nd. From the February 22nd pandemic plunge to June 1st, shares of Hertz lost over 90% of their value. Avis (CAR) realized a small rebound but was down over a third of her pre-pandemic dip value all the same. Additionally added for instructional purposes is Expedia, the online travel booking service; down over 25% since February 20th.
- Hotels: With the damage done to the Airline Industry and the Rental Car Industry it should come as no surprise that Hotels were impacted as well, and for all the same reasons. Hyatt Hotels (H), Marriott (MAR), Wyndham Destinations (WYND), MGM Resorts (MGM), and Park Hotels and Resorts (PK), all suffered at minimum a 28% decline since the February 20th Dip.
- Cruise Lines: Especially impacted by COVID-19 were the cruise lines. News of cruise ships quarantined in port decimated the share value of Royal Caribbean (RCL), Carnival (CCL), and Norwegian (NCLH) to the tune of -47% or less by June 1st; A solid shorting opportunity for those with the foresight.
- Oil Companies & Oil: Quarantines, travel restrictions, work from home orders, mandatory store closings, slowing economic commerce, and recreational park closings all led to a historic drop in the quantity of oil demanded. The oil industry quickly found themselves in full contango (fowardation), and for the first time in recorded history oil futures sold at a negative rate, meaning the owner of the contact was paid to take the oil away. However for those holding futures while speculating on a rebound, the negative dip on April 20th 2020 meant they had not only lost all the value of their contract, but they had to pay a buyer to to take it away from them. Indeed, what is a speculator going to do with barrels of oil, and where is he going to legally store them?. Traders who speculated on leveraged oil ETN’s quickly found that the institutions running the ETN’s opted to liquidate them before losing billions on an eventual rebound. From February 20th to April 28th the United States Oil Fund ETF fell from $90 to $17 before rising to $26 on June 1st. The large oil companies fared better, albeit they are still realizing a negative return in share price since the February 20th dip. Depicted below are the charts for Chevron (CVX), Exxon Mobile (XOM), British Petroleum (BP), Spider Energy Select Sector ETF (XLE), and United States Oil ETF (USO), as compared to SPY. As you can see they are all better short opportunities than SPY, but the index’s attached to oil futures are where the real shorting opportunities are amid a pandemic.
- BUY/LONG: Gold (GOLD/GDX/AUY/GLD/GDXJ), Volatility (VIX/VIXY/VIXM), Clorox (CLX), Work From Home (ZM/DOCU/DBX/WORK), Masks & Protective Wear (AHPI/APT/LAKE), Vaccines (NVAX/INO/MRNA/GILD)
- SELL/SHORT: Airlines (LUV/DAL/AAL/UAL), Car Rentals & Travel Services (CAR/HTZ.EXPE), Hotels (H/MAR/WYND/MGM/PK), Cruise Lines (RCL/CCL/NCLH), Oil (USO/CVX/XOM/XLE/BP).
- Gold: Gold ETF’s, major gold miner stocks, and gold indexes did relatively well during the Great Recession. Early on, as economic trouble became apparent, shareholders of these instruments enjoyed a solid return. Nevertheless as market selling intensified from July to September 2008, so too did the selling of gold instruments. The price of gold itself, however, rebounded very quickly. Just like our current experience in the COVID-19 Recession, GLD (Commodity Index ETF) proved to be the best protection from negative market forces. As this commodity index is tied to the value of gold, this should come as no surprise. Smaller gold mining companies represented by the VanEck Vectors Junior Gold Miners ETF (GDXJ) came out a close third at the beginning of the recession. However GDXJ worked its way up to second from the top of this list toward the end of the recession. This is likely because smaller gold companies have more room to grow and benefit from the increase in the price of gold than their larger counterparts which ended third on the list and is represented by the VanEck Vectors Gold Miners ETF (GDX). Finally the two individual gold companies Barrick Gold (GOLD) and Yamana Gold (AUY) did poorer than both the gold index and the miners indexes.
- Volatility: Once again those who had the foresight to bet on volatility as the market plummeted saw returns as high as 300+%! Traders of the CBOE Volatility Index (VIX) enjoyed particularly high returns when the banks began collapsing in early to mid 2008.
- Debt & Asset Recovery: Though Portfolio Recovery Associates Group (PRAA) & Encore Capital Group (ECPG) crashed with the market, they seriously outperformed the market on the way out of the recession, and then some! As it turns out, there is a huge market for companies that buy debt and engage in collections in a recession. PRAA operates in the U.S. and Europe and is one of the worlds largest debt buying companies. PRAA buys up debt under face value and recovers as much as possible for banks, retailers, and governments. Perhaps more lucrative, PRAA buys sets of problem debt on the cheap and instead of selling it they attempt to recover their holdings. ECPG is a similar global debt and asset recovery service. In addition to purchasing portfolios of defaulted consumer receivables on the cheap, they also consult the originators of the loans on how to manage bad debt, among other associated services. In a financially stressed environment these companies seem to excel. In booming economies, not so much.
- Discount Retailers: Unsurprisingly the more popular discount stores prospered during the recession. Walmart (WMT), Ross Stores (ROST), and Dollar Tree (DLTR), were among the most successful. Keep in mind that each of these companies have a high amount of exposure to Chinese imports. COVID-19 combined with a recession and trade tensions with China may affect these companies differently than during the Great Recession.
- Auto Parts & Maintenance: With high unemployment and underemployment people tend to tighten their budgets. And when record numbers of people are tying to stretch a dollar out as far as they can, they are more inclined to forgo a new vehicle purchase. That means maintaining the vehicle they have. Why, if you’re strapped for cash, would you take your vehicle to a mechanic for a new battery or an oil change? If you’re uncertain that you can pay the electric bill the following month, are you going to let the mechanic sell you a set of marked up wipers or replace the bulb in your tail light? Likely not. Which is why companies like Autozone (AZO), Advanced Auto Parts (AAP), and O’Reilly Auto Parts (ORLY) did so well during the Great Recession.
- Fast Food: Not all fast food restaurants did well during the recession. Indeed most did not. But the two solid standouts were Yum Brands (YUM) which encompasses Taco Bell, Pizza Hut, & KFC, and the fast food king, McDonald’s (MCD). Though unfortunate, it is likely cheaper to buy McDonald’s in many cases than to drop by the grocery store for some healthy food. Another benefit for folks working multiple part time jobs is that fast food is quicker. Furthermore, if you’re going to eat on on a serious budget, what better place to take the kids than to McDonald’s? Sure, it may not be your preference, but the kids like it, and a happy meal only costs a few bucks. And then there is Yum Brands. Perhaps rivaling McDonald’s as an even cheaper bite to eat is Taco Bell. It seems these fast food restaurants were built for a recession. While YUM felt the pain early on MCD share price was hardly phased by the economic downturn. Add it together with three years of dividends, all the merrier for the portfolio.
- BUY/LONG: Gold (GOLD/GDX/AUY/GLD/GDXJ), Volatility (VIX/VIXY/VIXM), Debt & Asset Recovery (PRAA ECPG), Discount Retailers (WMT/ROST/DLTR), Auto Parts & Maintenance (AZO/AAP/ORLY), Fast Food (MCD/YUM).
- Operation Martyr Soleimani: The most recent threat of war as of writing this was the Iranian attacks on U.S. Bases in Iraq in early January 2020. On January 3rd 2020 President Trump authorized an air strike on Iranian Islamic Revolutionary Guard Force Commander General Qasen Soleimani for arming Iranian backed militias to attack U.S. installations in Iraq. Around midnight in Iraqi time on 08 January 2020 Iran retaliated with a short range ballistic missiles on U.S. military installations. On the same day Iran also shot down Ukraine International Airlines Flight 752 killing 176 civilian passengers. Given President Trumps hard-line stance against terrorism, it appeared that the U.S. was on an imminent path to war with Iran. However late in the morning on the 8th of January, President Trump announced that deescalation was underway and opted instead to undergo economic sanctions.
- Trading the Iranian Attack: Trading this attack was impossible, but still instructive. Overnight oil futures jumped to a four month high pre-market but later returned to the prices they were trading the day before. This is simply because a quarter of the global oil consumption passes annual through the Straight of Hormuz, which neighbors Iran. A war with Iran would almost certainly mean shutting down the Straight. Gold also experienced a spike. So too did Volatility futures, defense contractors, and cyber security cloud firms. However, as President Trump was announcing that war with Iran was not on the horizon, the markets rebounded while these securities and instruments settled back to their pre-attack trading prices. I personally bought 10 SPY calls while watching the President speak and cashed them out for a quick $2,000.
- Trading Modern Warfare: Just as in recession and pandemics, gold and volatility typically experience a sharp increase in price. Unlike recessions and pandemics, however, government contractors and cloud security firm stocks generally experience a boost in price. Though cloud computing is relatively new and untested, the Iranian example may provide some indicator as to what to expect as modern warfare increasingly goes hybrid. Moreover government defense contractors may enjoy a sharp increase in price as they did after September 11th, the 2003 Invasion of Iraq, the announcement of Operation Inherent Resolve (Fight against ISIS), and amid the most recent conflict with Iran. Finally, oil futures generally go up on the threat of war as, 1.The oil rich Middle East is a constant source of international turmoil, 2. Wars bring into question international waterways and trade routes, and 3. Wars require a great deal of petroleum and jet fuel. While the greater market generally suffers amid international conflicts, these industries seem to prosper if not help to mitigate losses thereafter.
- BUY/LONG: Gold (GOLD/GDX/AUY/GLD/GDXJ), Volatility (VIX/VIXY/VIXM), Cloud Security Firms (HACK, CRWD/FEYE), Oil (USO), Government Defense Contractors (XAR/NOC/GD/LMT/RTX/ITA).
- Retail Natural Disaster Companies: A natural disaster that can be easily predicted is a risk that many businesses and homeowners can mitigate. And when a hurricane is expected to hit land within a few days, they spend money on home improvement supplies, generators, food, batteries, water, milk, toilet paper, among other supplies. Sure, the hurricane may take out some store locations; but stores are typically insured for damages and lost profit due to natural disasters. And the big box retailer Walmart (WMT) will sell a lot of supplies and foodstuffs in an at risk location. So too will Home Depot (HD) or Lowes (LOW). However both HD & LOW will also profit from the aftermath of the storm, as people buy goods to repair damages to their property. Generac Holdings (GNRC) will also likely benefit form a natural disaster. As a power system solution company GNRC builds generators, and not just the small ones that can power a few outlets in a home.
- After the Storm: Whether a hurricane goes inland or not, if the storm is large enough, there will be flooding. The worst flooding is generally reserved to towns along river basins and the worst can come many days after the storm has passed. Thousands of personally owned vehicles get swept away or damaged. As most people insure their vehicles, as required by law, they may have a claim. However insurance companies pay only for the depreciated value of totaled vehicles. Also many car insurance companies don’t cover water damage or floods. Many people will need to start over altogether and money may be tight. That’s why the used car dealer, Carmax (KMX), has done historically well after serious hurricanes and floods. Masco (MAS) is another contender to benefit from damaged homes. MAS designs, manufactures, markets, and sells home improvement products to include but not limited to Behr exterior paint, Delta & Hansgrohe faucets, and Kraftmaide & Merillat cabinets. Matrix (MTRX) repairs offshore oil rigs, onshore tanks, and electrical infrastructure. Finally, contaminated water is always an issue amid flood zones. Xylem Inc. (XYL) tends to benefit as a result via government contracts to make the water safe again.
- BUY/LONG: Retail & Home Improvement (WMT/HD/LOW), Generators (GNRC), Carmax (KMX), Home Supplies & Repair (MAS), Offshore & Onshore oil/utility (MTRX), Clean Water (XYL).
- SELL/SHORT: Insurance (ALL/TRV/CB/RNR/RE)
- Firearms: Mass shootings always make the headlines, and almost immediately after, politicians begin talk of banning certain types of firearms. If a Democrat is in the White House, the threat of banning a specific type of firearm or increasing federal rules and regulations on all firearms is especially noteworthy. In almost every case when Democrats demanded gun reform, there was a spike in gun sales and background checks. Moreover the firearms manufacturers enjoyed a steady backlog of orders from gun shops. Aditionally, if there are violent protests, people are more inclined to buy guns for self and home defense. Particularly when you turn on the TV and see truckers dragged out of their vehicles and beaten down, travelers harassed, or protesters damaging the vehicles of passing motorists. Indeed when all of these events happened against the back drop of the Black Lives Matter protests in late May to June of 2020, Strum, Ruger & Co’s (RGR) stock went up $10 per share. Should cities give in to demands to de-funding municipal police departments, that price may go higher. Firearms are one of the few industries that experience an increase in share price the more Washington talks about banning or restricting their business. Even all the talk about closing down gun shops amid the COVID-19 pandemic boosted RGR share price. Oddly enough, when mass shootings, gun store closures, and protests weren’t in the headlines, RGR was having a tough time meeting their revenue and EPS targets.
- Body Cameras & Police Equipment: The Black Lives Matter movement is in the headlines again, and as a result traders are speculating on police body cam plays. From late May to June 17th Axon (AAXN) is up over 23%. In the same time frame Digital Ally (DGLY) is up 469%. No, that’s not a typo!
- Legislation: Some legislation can make or break a stock. Word of a bill denying Intelsat’s, a foreign 5-G company, ability to profit off the C-band spectrum was enough to drive their share price through the floor and they eventually filed for bankruptcy. Increasing rules, regulations, restrictions, and taxes on cigarette and vaping companies will no doubt have an effect on Philip Morris. An increase in the federal minimum wage will have implications market wide on company revenue. Indeed it is always good to see what Congress has on the docket and assess as to if it will pass. In many cases politicians engage in the partisan act of pretending they want to pass a bill that they know will fail for no other purpose than to garner votes and paint the other side as evil. In most cases they do this knowing, that if their party controlled all three branches of government, they’d never bring the issue to a vote.
- President Trump’s Twitter Page: President Trumps twitter page has the power to move markets on direction or another. When he tweets of promising trade negotiations with China, there is typically a market rally. When he tweets the opposite, the markets decline. However, as far as talking up the markets go no president in my lifetime has done it better. Say what you will about the mans politics, the market loves him. And his Twitter page moves markets harder than the Federal Reserve Chairman testifying on Capital Hill. From 2017-2020 I could generally tell you what kind of day the markets were going to have based on what President Trump tweeted about trade and economic policy.
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