4 Stocks to Sell Before El Nino Batters Your Portfolio
Wildfires are raging in Western Canada right now. This is a huge reminder that weather has become much more unpredictable due to climate change. El Niño got going around June. Experts say we tend to witness the warming a year later. Cue the wildfires.
“Basing it on the El Niño at the beginning of the year, and then seeing how things are working out this year, it suggests that 2024 is going to be almost the same as 2023,” the CBC reported comments from Gavin Schmidt, director of NASA’s Goddard Institute for Space Studies in New York.
While La Niña is expected to bring in a cold and wet winter in the Northwest, it will also provide plentiful snow in most areas where snow is expected. That’s good for some ski resort locations, and not for others.
So, who will be hurt by the conditions brought on by La Niña? Here are four companies you don’t want to own heading into the second half of 2024.
Fortis (FTS) and Emera (EMRAF)
I’m based in Canada, so I couldn’t ignore the fact that two large Canadian utilities own assets in the Caribbean. Starting in June, La Niña is expected to increase hurricane activity in the Caribbean.
“The 2024 season could be in a similar state to seasons such as 2016, 2010, 2003, 1998 and 1995, when significant El Niño events were on the decline ahead of the next La Niña stage,” stated a February web post from Carilec, the Caribbean Electric Utility Services Corporation.
“These seasons experienced an average of 17 tropical cyclones, nine hurricanes and four majors, which is busier when compared to average.”
Newfoundland-based Fortis (NYSE:FTS) has operations in Grand Cayman, Belize and Turks & Caicos, while Emera (OTCMKTS:EMRAF) has operations in the Bahamas, Barbados and St. Lucia.
Fortis’s Caribbean operations account for just 3% of its assets, so they’re less of a worry for shareholders than Emera. In addition to the Caribbean, which delivers electricity to 150,000 customers in the region, Emera has a massive operation in Florida, accounting for 54% of its adjusted net income in 2023. If Florida takes it on the chin, Emera will face significant costs in restoring its power plant.
I’d be more comfortable holding NextEra Energy (NYSE:NEE), the largest utility in the U.S. and, by extension, Florida.
Universal Insurance Holdings (UVE)
Universal Insurance Holdings (NYSE:UVE) is Florida’s second-largest provider of homeowners insurance. In 2023, it generated $1.92 billion in direct premiums written, 81% in Florida. Of the $1.57 billion in Florida premiums, 87.7% was for homeowners, another 6.9% for condo insurance, 5.3% for Landlord insurance and 0.1% for other types.
In Q1 2024, the company’s revenue was $368 million, 16.3% higher than Q1 2023. That translated into $47.5 million in pre-tax income, nearly 45% higher than a year earlier. After-tax per share, it earned $1.14, 44.3% higher than in Q1 2023.
Over the past five years, the insurer’s combined ratio had averaged 107.4% — anything over 100% indicates an underwriting loss for the year — which means it hadn’t had an underwriting profit since 2018 when it was 87.3%.
Its combined ratio in Q1 2024 was 95.5%, 450 basis points lower than a year ago. More importantly, it delivered an underwriting profit in the quarter for the first time in a while.
Fortunately, the company’s net investment income in 2023 was $48.4 million, the highest amount over the past six years. That helped grow its pre-tax income.
If La Niña whips up a busy hurricane season, I wouldn’t expect underwriting profits for the third and possibly the fourth quarter.
That makes UVE a pass.
Walt Disney (DIS)
Walt Disney (NYSE:DIS) stock is up more than 13% in 2024, although it is well off its 52-week high of $123.74 in early April and down 49% from its all-time high of $203.02 in March 2021.
The company’s share price is at a crossroads. Does it resume the leg up that started last October, or does it return to the high $70s where it traded six-and-a-half months ago?
A busy hurricane season could dent Walt Disney World’s revenue, the company’s — and Florida’s — big moneymaker. Last November, Oxford Economics released a study that found the Walt Disney World Resort generated $40 billion in economic benefits to the state of Florida in 2022, directly and indirectly creating 263,000 jobs.
You might scoff at the notion that one bad hurricane season would do irreparable harm to Disney’s overall business — it generated nearly $89 billion in revenue and segment operating income of $12.9 billion in fiscal 2023 — but it is spending $60 billion on its Experiences business over the next decade. This accounted for 36% of its revenue and 70% of its operating profits last year, so it has a lot riding on Walt Disney World’s future success.
The problem is that the annual hurricane season will not disappear. If anything, it’s going to get worse, making financial hits like the $50 billion caused by Irma more commonplace and resulting in repeat shutdowns of Disney properties in the state.
Buyers beware.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
