Themed Watchlist 4: Let it Rain

Last October I started building a themed watchlist and I think we can now start to add more definitively to the list. The basis of the list is the Met Office report that expects the next two years to be the hottest on record. In my second piece on the subject I did some TA on the weather, and came to the conclusion that the winter here, particularly in the South East of England, was unlikely to be cold. So far, so good. It’s been incredibly mild and one other important thing: wet.

This leads me to two logical conclusions. Firstly, that insurance companies are now firmly on the short list, and that energy companies are too.

One of the worries I had about putting specific insurance companies on a watchlist is that you need to do so much work to find out what risk they have. They’ll have laid it off like a bookie all over the place. But claims of course do hit the P&L. We’ve had severe flooding in the North of England but many insurers are more global. No problem. Severe flooding of the Missouri in the US, Paraguay, Ireland… the list goes on.

So we need to be far less worried about specific risk, as the problem is now more global. However, a quick look at the FTSE350 Nonlife Insurance Sector chart reveals that there has been no appreciable impact on insurance stocks thus far. It shows a very intact upwards trend and we’d certainly need to see a fall below the cloud to be interested in shorting. We would do well to find the straggler in the pack – is there a particular company, or set of companies, where there has been a bit of price action damage? It’s often a good tactic to look for the out-performer in a sector in whichever direction you are looking at.

Direct Line (DLG) looks rather a lot like the index itself. That could prove a useful thing to know. Certainly worth keeping an eye on. A couple of laggards are Lancashire Holdings (LRE), which has a somewhat lacklustre looking chart – watch for weakness there – and Hastings (HSTG), which is a new listing so not much to go on there, except that it hasn’t really found direction yet. Again, a sign of weakness could be an opportunity there.

The absolute shocker of the sector is RSA Insurance Group (RSA). I don’t think I’d want to get involved with that price action at all. It’s the sort of thing I might buy a speculative really out of the money put Covered Warrant on, or something. Low, low price and regard it as a fun punt. Trouble is that this stock could easily be ripe for M&A. I imagine there will be a bit of a sense of urgency about M&A now interest rates are starting to rise. M&A ruins short positions and it’s something that always needs to be considered.

I’ll deal with energy in the next post.