Macquarie Discusses Hurricane Season And Stock Plays

In a report published Monday, Macquarie analyst Amit Kumar discussed the 2015 Atlantic Hurricane season, noting that a decade has passed since a land-falling Florida hurricane has struck.

"To give you some perspective of how much time has elapsed since then, SPX was trading at 1248 at year-end 2005, 28 percent of US internet users were still using dial-up access and the last Star Wars movie was released," Kumar wrote. "Although Hurricane predictions have varied over the years, this year's is unusual with Dr Klotzbach/Gray team predicting one of the quietest hurricane seasons since the middle of the 20th Century."

Kumar said the NOAA released their first hurricane forecast of the season which suggested a 70 percent change of a below-normal hurricane activity. Nevertheless, the analyst did note that from a historical perspective, in the event of an "active" Hurricane Season, stocks may sell off when hurricanes approach landfall in the U.S., only to recover beyond the initial sell-off. A "large" loss of $100 billion to $200 billion could pressure the "smaller players" with "outsized hits to equity" but rates could likely go up "meaningfully" for the market.

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A second scenario exists in which the Hurricane Season will result in some small damage, but not enough to cause a serious dent in the capital position. As such, stocks may trade sideways before "pricing pressure" at 1/1/2016 reappear.

Finally, under a "benign" Hurricane Season, stocks will likely recover towards the end of August and September in anticipation of good earnings/book value growth and resumption of share repurchases.

Heading into earning season, Kumar suggested investors buy Arch Capital Group Ltd. (NASDAQ: ACGL) given its diversified platform and relatively low cat exposure. Other names Kumar recommended investors "ponder" would be XL Group plc (NYSE: XL) (post Catlin) and Endurance Specialty Holdings Ltd. (NYSE: ENH) (post MRH). The analyst also noted that it is "too late" to play the consolidation trade anyways.

Shares of Arch Capital are Outperform rated with a $69 price target.

Shares of XL Group are outperform rated with a $42 price target.

Shares of Endurance Specialty Holdings are Outperform rated with a $70 price target.

Image credit: NASA Goddard Space Flight Center, Flickr