How They (And You) Make Money Off Disasters

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BOSTON (MainStreet) -- Especially in light of fatalities in North Carolina and Virginia, it is painful for many to think disasters such as Hurricane Irene carry an upside.

That's not so for many people, from those grieving to those who lost homes or boats or face huge repair bills. Insurance companies similarly will lose.

But the reality is that one result, and possibly the only silver lining, will be much-needed work for contractors, carpenters and electricians needed to mitigate damage from wind and water. Such repair work and prevention would have been even greater had an earthquake the same week on the East Coast -- centered in unlucky Virginia -- been even stronger.

Another beneficiary of devastating weather are all those supermarkets and retailers who, in the run-up to this and other storms, clear their shelves of bottled water, duct tape and canned goods.

It's a truism: Tragedy and disaster hurt many, but can profit a few. Nature's fury, war and terrorism will always make some fortunes and boost returns for investors. Disease may sicken and kill us, but benefits hospitals, drug companies, insurers and those who invest in them.

Author Naomi Klein coined the phrase "disaster capitalism" to summarize the rush for profits amid catastrophe and war. In The Shock Doctrine: The Rise of Disaster Capitalism, she compares disasters and conflict with IPOs that set the stage for revenue. The declaration of war in Iraq meant money for support, security and reconstruction efforts contracted to private companies, many of whom lobbied for invasion leading to the ongoing conflict.

Is there a conflict for investors who profit from human misery?

Ultimately, that depends on one's own moral compass. Wall Street is always a dog-eat-dog world with consequences investors may not realize. A play on Apple can be a bet against Samsung, Google and Microsoft. An investment in Ford or JetBlue can work against GM and Southwest Airlines. As one company falters in the shadow of another, is the investor role partly responsible for layoffs -- indirect pain, but pain nonetheless?

The following are ways some benefit from human misery and tragedy:

War

War is hell, but also very profitable.

In decades past, being called a "war profiteer" was a high-level insult. Today, it could serve as the elevator pitch for a business model.

With the U.S. embroiled in a nearly decade-old war in Iraq, paired with ongoing operations in Afghanistan, there is no shortage of companies turning a profit amid violence. The defense and Homeland Security market represents nearly 5% of U.S. GDP.

Lockheed Martin is the largest military contractor in the world. Investors have reaped a more than 10% dividend during each year of these two wars.

Other companies with a predilection for defense contracts, both for combat and rebuilding efforts, include Halliburton, Northrop Grumman, Boeing, DynCorp International, Alliant Techsystems, L-3 Communications, General Dynamics, Perini, URS, Fluor and Bechtel. Navistar, Textron and Force Protection have all boosted their bottom line making armored, mine-resistant vehicles. Earlier this month, Oshkosh was awarded a $904 million contract to build 7,000 additional tactical vehicles for the U.S. Army. Retail investors also have the choice of funds to work with if they seek upside from the horrors of war. The PowerShares Aerospace & Defense ETF tracks the Spade Defense Index, made up of more than 50 firms with business activities that include naval vessels, military aircraft, missiles and munitions, homeland security and space systems. The iShares Dow Jones U.S. Aerospace & Defense Index Fund tracks the Dow Jones U.S. Select Aerospace & Defense Index and includes among its holdings General Dynamics, Lockheed Martin, Northrop Grumman and Raytheon. The Fidelity Select Defense & Aerospace Fund has among its top holdings United Technology, Rockwell Collins, Boeing, Honeywell and Goodrich.

Weather

Steven Horwitz, professor of Economics at St. Lawrence University in Canton, N.Y., makes the case that private industries have proven to be more effective than federal relief efforts in the aftermath of disasters such as Hurricane Katrina. Their role in getting communities back on their feet is ultimately profitable for their bottom line.

"The best example of a successful private-sector response is that of Wal-Mart and other 'big-box' retailers, such as Home Depot" and Lowes, he wrote in the paper Wal-Mart to the Rescue: Private Enterprise's Response to Hurricane Katrina. "Wal-Mart's successful response to Katrina, along with the failure of FEMA and other government agencies, seems to confirm the more general conclusion of modern political economy that private institutions better mobilize resources than do public agencies."

"The incentives for private firms to protect their own capital led them to begin preparations for the storm well before its landfall," Horwitz says, noting that Wal-Mart uses its own hurricane-tracking software and hires private forecasters to keep it up to date with storm information.

At the peak of the Hurricane, 126 of Wal-Mart's stores and two distribution centers were closed due to power outages and flooding. Within 10 days, all but 15 had reopened.

In the three weeks after Katrina's landfall, Wal-Mart shipped nearly 2,500 truckloads of merchandise to the affected areas and had trucks in place to ship relief supplies, he says. Home Depot provided more than 800 truckloads of supplies. Those goods were sold in stores, as well as distributed free in many cases to affected residents and the organizations helping them.

"Profit-seeking firms are often criticized for supposedly being interested only in short-term gains, but private ownership as well as capital and equity markets ensure that such firms have to take longer-term interests into account," Horwitz wrote. "This reality was clear during Katrina as the big-box stores chose to give up some potential short-run profits in order to gain in the long run and, in so doing, better served the community. A Home Depot executive commented that any profits it might lose in the short term were more than compensated for by increased customer loyalty: 'If we can be there when a customer needs us most, we can win that customer for life.'"

Terrorism

Beyond the loss of life, limb and property caused by terrorism, ongoing fear and prevention efforts have proven a profitable sideline for many companies.

Beyond military action in Iraq and Afghanistan, there is "The War on Terrorism."

That has meant new markets and increased competition among companies developing technology used in surveillance, as well as tools to detect and counter the effects of bioterrorism agents such as smallpox, anthrax and radiation.

Armor Holdings makes armor and bulletproof vests for security personnel, and CompuDyne develops and makes reinforced, explosion-resistant windows used in high-security government buildings. Electronic surveillance and detection efforts have provided profitable sidelines for such companies as Lockheed Martin, Raytheon, Northrop Grumman, Goodrich, Visage Technologies (which develops facial recognition technology) and Identix (which markets fingerprinting technology).

Homeland Security has also established websites to educate small businesses in ways to do business with them and offer larger companies bidding opportunities.

Perhaps the best known -- and most reviled -- moneymaker in post-9/11 measures is Rapiscan, the primary provider of so-called backscatter X-ray scanners in place at airports. As anyone who flies knows by now, these machines "see" through clothes and use a rather abstract portrait of the naked traveler to detect smuggled weapons and other contraband.

The primary beneficiary of the machines is Rapiscan's owner, OSI Systems. Among the notable investors in OSI was billionaire George Soros, who has since sold his shares.

Political unrest

Conflict Securities Advisory Group, an independent research provider specializing in identifying companies doing business with Iran, North Korea, Sudan, Syria and Cuba. (That's more than 800 publicly traded companies, it says.)

The group works with mutual fund providers, individual investors and pension systems and their asset managers to help funds design and implement custom "terrorist-free" international portfolios. When the populace has enough and fights to overthrow the government as was the case in the "Arab Spring" protests, companies also see opportunity. The battle in Libya to overthrow dictator Moammar Gadhafi is a case in point. For years, sanctions and demands that 90% of oil production be kicked back to the official state oil company have dulled the earning potential of foreign companies.

Among the oil companies with ties to Libya expected to benefit from Gadhafi's exit are: ExxonMobile, BP, ConocoPhillips, Hess, Marathon, Occidental Petroleum and Italian oil producer ENI.

 

Oil crisis

Oil shortages and price spikes have many victims.

Households, in particular, suffer as the price at the pump grows and products made with petroleum get more expensive.

While they languish, others prosper. Commodity investors are poised to win as oil prices spike, and the impact ripples throughout their marketplace.

The big winners, when oil prices and supply dips prove to be seismic and not just temporary, will be those involved with "green technology," including the hybrid and electric cars made by Toyota, Ford, Nissan, GM, Tesla Motors and Detroit Electric.

High energy costs also benefit companies in the space, leaders among them being GT Solar, First Solar, JA Solar, Sun Power and SolarCity, which counts Google among its investors.

Wind turbines would also gain more acceptance for industrial and home use, benefiting the (small, but growing) manufacturers such as Vestas, GE, Siemens and Southwest Wind Power.

 

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