It was quite a day.
The limit order to buy that I moved up to $25 over the weekend executed. The Kelly Letter bought at $25 and the stock closed at $24.50.
dropped 10% to close at $17.80. That puts us down some 6% from our buy at $19. People have asked me about stop losses on this stock. I generally use -9%, but I haven’t placed it as a stop order yet on this stock. It’s just a mental stop because I feel that this is a special circumstance where an entire industry is being unfairly punished. The reason for today’s big drop is two-fold:
1) The company released its initial liability estimates for Katrina and projected a loss this year of $85 to $165 million, assuming no more major catastrophes this year.
2) That assumption of no more major catastrophes became suspect when Tropical Storm Rita began accelerating into a hurricane and heading toward Florida and New Orleans.
This, of course, drove the price of oil up as the already-damaged oil refining region faces another threat. sold off because it may have even greater losses on top of Katrina if Rita hits with the same consequences.
A couple of ideas here.
First, there’s probably not much left to damage in New Orleans at this point. People are already evacuated and the city is already flooded. There should be little additional damage if another hurricane slams the city before repairs have been made.
Second, Rita might not cause any damage, in which case we should see a relief rally after she dissipates.
Also, you may recall from the initial note I sent recommending that a big reason for buying is that the company will survive these losses and remain standing in an environment of higher insurance premiums. Those higher premiums will lead to more profit for the company in the future and, therefore, a higher stock price. That’s the rationale for investing.
I want to draw your attention to a little-noticed line near the bottom of today’s AP story about estimated losses:
Like other reinsurers after the storm, predicted a rise in reinsurance rates.
The rationale has not disappeared. Let’s hope that Rita does, and that we can get this investment and the Gulf region back on track. I know that the market can remain irrational longer than we can remain solvent, so I’m watching this carefully and will exit if it looks like too much downside ahead. As I did with UTStarcom, we may take a short-term loss and look to re-enter at lower prices for another try. I hope not, though.
The good news for you if you have not yet bought is that you now have an even better opportunity than I. The company is the same. The stock is cheaper.
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