The Chicago Tribune

Blackout is latest crisis to spark some big gains

August 19, 2003
By Andrew Countryman

You're an investor. A crisis hits. What to do?

Why, try to make money, of course, by figuring out who stands to benefit and buying their stocks.

The latest incarnation of this all-too-predictable response occurred after last week's massive blackout. Investors rushed into shares of firms that build and repair electrical network infrastructure, provide power storage or are developing alternative energy sources, including fuel cell technology.

Those stocks were hot commodities Friday--in some cases trading more than 15 times their average daily volume--and jumped sharply, with several gaining more than 20 percent on a flat day for the market overall.

"What a surprise," said Clint Morrison, senior research analyst at U.S. Bancorp Piper Jaffray in Minneapolis. "Any time you have an event like this, there is something of a knee-jerk reaction."

On Monday, the power was back on, but many of these new market darlings managed not to fizzle, holding on to--or even building on--those gains.

Electric network infrastructure firm Quanta Services Inc., for example, added nearly 9 percent Monday to its 28 percent jump Friday, and microturbine firm Capstone Turbine Corp. picked up 3 percent on top of Friday's 22 percent gain.

That kind of reaction has become as routine as the finger-pointing over what caused the problem in the first place. Investors looking for emerging opportunities--and traders looking for a fast buck--flock to firms that presumably can capitalize on the situation.

But whether the run-ups are justifiable, and sustainable, is another matter, analysts said.

Eric Prouty, an energy technology analyst at Adams, Harkness & Hill in Boston, said "event-driven" stocks, particularly firms that are losing money while they develop products, often endure a pullback after news sends their stocks soaring. "Investors need to realize, especially with the developmental-stage technology, this is a marathon, and not a sprint," he said.

This is all reminiscent of the surge in high-tech security and identification stocks after the Sept. 11 terrorist attacks.

As the broader market tanked when it reopened a few days later, several of these stocks had huge gains and continued to climb for months.

Since then, however, the promise of vastly increased spending on these technologies remains mostly promise, and several have sunk back to their pre-9/11 levels.

"There certainly was a rush by firms ... to market themselves to the government," said Trevor Prout of International Biometric Group, a consultancy in facial recognition, retinal scanning and other advanced technologies. "A lot of the contracts have yet to be awarded."

Opportunities still remain, he said, for increased private- and public-sector spending. The expected surge hasn't been abandoned, he said, but was delayed by budget squabbles and the ramping up of the Department of Homeland Security.

"Now that that's behind us, I think we are starting to see these projects moving forward very quickly," Prout said.

Some of those companies have continued to build on their post-Sept. 11 stock gains. To determine which power players will do the same, some experts said, a key will be to monitor trading by company insiders.

It's a strong signal about a company's prospects, conventional wisdom goes, when insiders are selling in clumps. Among the security stocks, for example, some of those that have fallen furthest since their post-Sept. 11 jump are those with the heaviest insider selling.

Two--Armor Holdings Inc. and CompuDyne Corp.--had an average 48 percent run-up in the first day of post-Sept. 11 trading, then saw more than $31.5 million worth of selling by more than a dozen insiders in the next six months. All of the sales were for prices well above the stocks' current levels.

"I always tend to look at that," Morrison said. "If there's a spike in the stock and managers and insiders take advantage of that, they're speaking pretty clearly."

Analyst Prouty said he, too, looks at insider transactions, but he also will be looking to the coming debate in Congress for clues about where electricity spending might be channeled.

Overall, experts said the dramatic stock run-ups, frequently followed by sharp falls, in these cases are partly the result of human nature--that is to say, greed--and partly because of circumstances.

The market tends to overreact, Morrison said, and it can be especially dramatic when many people are moving into smaller, less-liquid firms, like many of the power firms. "Everybody's thinking they can figure out the beneficiaries better than the next person," he said.

Long term, he said, the heightened political interest in the power area suggests that spending will indeed increase, and many of the companies will have improved prospects.

And for now, Morrison said, it's hard to push against these firms' tailwinds. "In the short term, the market is right--it's worth 30 percent more because you can sell it for that," he said.