Monday, October 09, 2006
(1:26 PM) | Anonymous:
Stock Picking Followup
Exactly three months ago in "A Fall Hurricane Strategy", I took a long position on the insurers with the most hurricane exposure, claiming that they'd been oversold and would see a good bounce back over the summer and fall, especially if the hurricane season was anything less dramatic than last year's. I mentioned ALL, MRH, and RNR.I also recommended some natural gas companies as a hedge against bad hurricanes, and as worthwhile plays in their own right. Specifically: COP and CHK.
So how did that pan out?
Well, as long as you didn't overhedge the position, you made money. All of the insurers are up since I mentioned them in July. From the market open the day after my post, ALL is up 14%, MRH is up 7.4%, and RNR is up 12.4%, for an average 3-month return of 11.2%: annualized, that's 44%!!
What about the natural gas? Well, the point of hedging is obviously to protect your downside, and that always cuts into profits a little bit. CHK ran up over 13% in the last few days of July, and a trailing stop would've taken you out of that position in early August. But even if you held on, CHK today is almost even with where I originally recommended it: no major hurricanes and forecasts for a warmer winter have kept the price of natural gas very low. That, and the recent selloff in crude oil.
Speaking of crude, COP was a bad choice on my part. I picked it for a good reason - it was increasing its natural gas exposure - but COP is also a major oil player, and at the time I wasn't expecting the oil patch to get so overextended (nobody was). This stock went up 4% from where I picked it, but is now down about 14%. Decent stops would have protected you from this, but, assuming you took a hedging position only half as large as your primary insurance position, I'll mark COP down as -7%.
So, the totals. Worst possible combination: MRH/COP is a breakeven at .4% (I don't factor in transaction costs, since they vary so much). Best possible combination: ALL/CHK at 14%, assuming that CHK stopped you out.
Not bad for 3 months: it beats the market averages and most mutual funds soundly.
