Absolutely nothing! Say it again!
(Author’s clarification: Well,
actually what I mean to say is that this war is not much in the way of
creating great investment ideas. Ridding the world of duplicitous
dictators with WMD? That’s a different issue...)
As you might imagine, the thing I’m
asked most often these days is what the war will mean for the market,
and more specifically, what ways there are to make money,
post-conflict. My answer is a bunker-busting bomb’s worth of
disappointment. As of now, there are very few ways to directly benefit
from “war plays,” and there are few worthwhile clues from what did
well after the last Gulf war. However, the war, and its eventual end,
will mean good things for some broad types of stocks. I’ll get to
those in a minute.
War Plays or Sucker Ploys?
As far as "war plays" are
concerned—companies that will benefit directly—most are an aberration.
There are very few investment themes or companies that will benefit
directly from this conflict. All of the obvious ones have been either
been overbid already, or won't benefit the way some predict they will.
Consider Boots and Coots (WEL). They
put out oil well fires and have been hired as a subcontractor to
assist in Iraq. This company’s stock ran from an 6-cents-a-share low
in October to an intraday high of $2.55 last week. That’s 4150% growth
in five months. Their run up smacks of the most outrageous trading
behavior, not seen since myriad folks lost their hat “day trading.”
This company is in serious financial trouble and they’ve said nothing
to dissuade investors otherwise, despite the contract to put out a few
burning oil wells.
The Real Deal
The real investment opportunity related
to the Iraq war will be a function of what the economy holds in store
when unshackled from the uncertainty associated with the war. In other
words, the end to the war will provide a catalyst to a struggling,
albeit recovering economy.
Corporate managers are deferring
purchasing and cap-ex decisions because their customers are. Even
though consumption is solid, consumer sentiment is at a decade low.
One of two things will have to get reconciled. Either consumers will
find justification for why they need to stop spending because of the
war—thus, spending falls to match sentiment. Or, consumers see the
light at the end of the tunnel, and
that the war doesn't really impact them, and sentiment rises to meet
spending.
My guess is that the latter will occur.
Corporations will see sentiment matching spending, and they'll be
comfortable building inventory and making capital investments. From a
base of low interest rates, no inflation, and reasonably low
unemployment, the economy will pick up speed.
Don’t Take Too Much Away from the
Last Gulf War
Since a limited conflict like this is
really mostly a retardant on economic expansion, the post-war
opportunities are a function of what types of stocks will do well in
the economic backdrop, post-Iraq-conflict. But the stocks that did
well last time may be different than the ones that do well this time.
That’s because the last recession was very different from this one and
the bear market preceding the Last Gulf war was different as well.
So Who Wins?
Stocks will sense the economic
expansion before it that makes its way to Income Statements. The
market will continue to recover led by two major types of stocks:
economically sensitive ones and high-beta stocks that always lead a
rising market. That bodes very well for consumer cyclicals, service
stocks, and high tech. Lagging areas will include defensive and
low-beta stocks like consumer staples, health care, and utilities.
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