Don’t be Skittish: The Knee-Jerk Response to Ebola

When investors succumb to fear, sometimes they make hasty decisions about entering — or exiting — a stock that they shouldn’t have changed their position on. And it’s quite likely that stocks affected by Ebola — stocks whose prices are currently being dwindled by fear — will before long see themselves return to their original positions.

My son reminded me of this recently when he had to write an essay comparing the cultural and social impacts of the Ebola outbreak in Africa to the Black Plague that swept Europe and Asia in the 14th century.

As he and I talked about the comparisons, I realized there’s a comparison I, too, should be making … in the financial markets.

It was February 2003 when a World Health Organization doctor examined a U.S. businessman in a Vietnamese hospital who’d contracted an unknown form of pneumonia. By March, panic was spreading across Vietnam and Hong Kong as the WHO issued a global alert on a new infectious disease it had named “sudden acute respiratory disorder” — SARS.

Across Asia, stocks sold off as fear gripped the markets. Hong Kong shares fell nearly 15% between January and March. Singapore lost 12%. But one industry in particular took the SARS news especially hard … and ultimately they represented a huge opportunity for investors who realized that SARS was a temporary phenomenon.

That same opportunity is emerging today …

Heed the Hysteria, Miss the Markets

When news broke recently in late-September that a Liberian man brought Ebola to America, airline stocks were already under pressure as fears spread that Ebola would, one day soon enough, exit the African continent on an airplane — therein shutting down the air-transport sector for a time, just as the 9/11 terrorist attacks did.

The rationale is understandable at first blush. Tourism does face a temporary impact, potentially. Ultimately, though, it’s a knee-jerk response by skittish investors.

It’s exactly the same response I saw as an investor in Hong Kong and Singapore when SARS erupted more than a decade ago. Take a look at this chart below:

Those lines — none of which are important individually — show the trajectory during the SARS scare of six major hoteliers and airlines in Hong Kong and Singapore … Cathay Pacific Airways, Singapore Airlines and China Eastern Airlines, and hotel chains Shangri-La Asia, Mandarin Oriental International and Hong Kong and Shanghai Hotels. They fell between 17% and 31%.

And here’s the trajectory of those same six stocks through the end of 2003:

They rose between 35% and 78%.

Those two charts illustrate well the point I routinely make: Existential events that cause investor angst are rarely — if ever — a reason to sell a stock. More often, they are the very reason you should be a buyer of the stock amid the sell-off!

Investor panic during such events is an emotional response to typically unfunded fears. In today’s example, the fear is: “Ebola will spread! People will stop traveling! Dump the airlines and the cruise lines! Now!”

That’s never a smart reaction in the investment market.

In such moments, there are questions to be asked, and the SARS scare serves as a good classroom.

Was SARS going to permanently alter travel through Hong Kong and Singapore? It might have killed a relatively tiny number of trips and delayed others, but beyond the immediacy of the moment there was never a risk that the outbreak would fundamentally change travel patterns to and through two of Asia’s most important tourism and commercial cities.

Was a one-off event going to radically change the business of hotels and airlines in the region? Nope — not even in the slightest.

Those are the same questions you have to ask today in America.

Stocks Affected by Ebola Will Return to Normal

So, let’s apply that same logic to Ebola.

Beyond the immediacy of the nightly news, is Ebola — a virus that is substantially more difficult to contract than SARS was — going to fundamentally change the travel patterns of tourists and business travelers?

Nope.

Is Ebola going to radically alter the earnings power of airlines and cruise ships beyond a very brief moment in time?

Nope.

Is Ebola likely to spread dramatically in America, to the degree that air and cruise travel is shut down or sharply curtailed?

Nope.

Yet, travel-related stocks in the U.S. have all come off in the wake of Ebola. American Airlines, Delta Air Lines, JetBlue Airways, United Continental, Carnival Cruise Lines and others have all seen their shares fall in the days since Ebola landed on American shores.

The Chicken Littles have thrown up their hands and fled because, to them, the sky is clearly falling.

And I stand there as a patient, sober-minded investor happily catching the shares they’re throwing away.

I’ve seen this movie before — and I profited from it nicely … because, in the end, the angst always fades and rationality always returns to the market.

In particular, I expect American Airlines, Carnival and JetBlue will rebound, and those who snap up the shares now, amid the weakness, will find they’re sitting on profits when the fears subside.

Until next time, stay Sovereign …

Jeff D. Opdyke
Editor, Profit Seeker

The post Don’t be Skittish: The Knee-Jerk Response to Ebola appeared first on The Sovereign Investor.