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Japan's Nuclear Disaster and BP Oil Spill

March 15, 2011 | About:
matsandalex

matsandalex

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Several investors are contemplating buying Japanese or nuclear related equities. After seeing a 20-30% plunge in some stock prices like the Market Vectors Uranium and Nuclear Energy ETF (NLR) investors are tempted to bargain hunt.

Should investors buy Japanese equities or nuclear related stocks on the latest plunge?

Perhaps the most recent comparison to the nuclear disaster would be the offshore oil spill in the Gulf of Mexico.

In the aftermath of the tragic spills several world renowned investors concentrated their portfolios in oil service stocks. Ken Heebner bought oil service stocks and they comprised 10% of his portfolio as of December 31, 2010. In addition, money managers like John Paulson, Mario Gabelli and David Einhorn all bought oil service stocks aggressively in the fourth quarter of 2010. After the BP spill was contained and disappeared from the headlines, oil service stocks rocketed 40-60% making huge fortunes for these fund managers.

What is the lesson we can learn from these brilliant fund managers?

First of all, they bought several months after the BP spill became worldwide news. BP stock started to crash on April 23. Foolish speculators rushed to buy shares at 10-15% off. However, the stock continued to plunge until June 28 when it hit a bottom. The early speculators watched the stock plunge another 50%.

There was a similar downward trajectory in the oil service providers where the OIH went from $135 to $90/share in a month. This is why the Wall Street adage "don't try to catch a falling knife" is plastered on the walls of trading floors.

In the offshore oil disaster of 2010 it took about 2-4 months for the selling to be flushed out and stock prices to stabilize. The "guru" money managers then snapped up shares on the cheap.

Smart investors like Marc Faber are pursuing a similar wait and see approach. In a recent interview with CNBC, Faber said, "Until you know whether there will be a nuclear meltdown or not, it could take 1-2 months, it can last a long time, you don't know if there is a second earthquake that can have a larger impact, you don't know."

The prudent action is to compile a watchlist of Japanese equities or nuclear related stocks to purchase when the crisis has disappeared from the front pages of newspapers.

Rating: 3.8/5 (11 votes)

Comments

Sivaram
Sivaram - 3 years ago


A lot of the gains that you cite had little to do with the BP disaster or any deep-sea drillign moratarium (and so forth). Instead, I would argue that the gains were almost entirely due to the rally in crude oil. If crude oil didn't rally from around $80 to the current $100ish, I doubt the gains would be so large.

I'm not arguing against your strategy (in fact, I'm looking at Japan too) but some of those oil investments likely had nothing to do with the BP situation.
matsandalex
Matsandalex - 3 years ago
I agree with you. Quantitative easing played a part in the rally in all stocks generically.

Nonetheless, I generally find that it takes 2-6 months for sellers to be flushed out.

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