Credit: Shutterstock photoThe first noticeable earthquake I experienced was a memorable event. I was working on a Cable (GBP/USD) desk in an office building in the financial district of Tokyo when the floor below me began to move and my wheeled office chair started to roll around, seemingly of its own volition.
You would think that alone would be the memorable part, but it really isn’t. What I remember most is the reaction of our Dollar Yen (USD/JPY) desk as it became evident that a tremor was taking place. There was a huge roar as everybody tried to buy Dollars and sell Yen. The attitude was that if this turned out to be “the big one” and we were all going down, we may as well go down short of Yen.
To anybody who has never worked in a dealing room environment, this probably sounds unbelievably cynical and heartless. To anybody who has, it will come as no surprise. The point is that, in life, stuff happens. To position yourself in such a way as to benefit if something bad occurs is simply to hedge life, like a sports fan who bets on the other team, reasoning that then they win either way. We don’t take out life insurance in the hope that we die, but in the knowledge that it will happen at some time and, given that unfortunate fact, we may as well make sure that our families receive financial compensation when it does.
These thoughts occurred to me when, following last week’s better than expected earnings from Tetra Tech (TTEK), I began to look at stocks in the pollution control sector. One of my first thoughts was “Do I really want to be in a position to profit from an environmental disaster?” I have been out of a trading room long enough for the honest answer to that question to be “No,” but as I dug deeper it became clear that investing in the sector wasn’t necessarily a bet on disaster.
In fact, if you look at the performance of TTEK around the time of one environmental catastrophe, the Deep Water Horizon spill in 2010, you will see that, after an initial pop immediately following the tragic events of April 20th 2010, TTEK came under pressure.
Nothing happens in a vacuum, of course, and the summer of 2010 was when we were all worried about the “Euro-Crisis” and talk of a double dip and global collapse was everywhere, but that is still a pretty spectacular drop for a company poised to benefit from a cleanup operation. Such contracts, however, are a very small part of the revenue from companies like Tetra Tech.
Consulting, construction and engineering work designed to minimize the risk of such an occurrence is far more important.
So, now we know that you can invest in TTEK with a clear conscience, the question remains, should you do so at all? The answer, I believe, is yes.
The price action around the earnings release last week illustrates a point I often make; a stock’s reaction to earnings usually says much more about the market’s positioning going into an announcement than it does about the substance of the report. The stock had two good days on Thursday and Friday, gaining 6.26% in total, so it would be reasonable to assume that this was an upbeatearnings call right? Well, not really.
TTEK did beat on the bottom line, with profit of $0.42 per share vs. a consensus estimate of $0.38, but that was on lighter revenue than expected and the Q2 guidance given was nothing to write home about. The news wasn’t bad, but it didn’t seem to warrant a 6.26% jump in the share price. The week of heavy selling that preceded it, however, would indicate that the market was expecting far worse. Usually this kind of relief rally is a selling opportunity, but I believe the long term prospects for TTEK look good enough to take the chance of a short term drop in your stride.
The long term case isn’t hard to make. Tetra Tech also announced last week that they had been awarded two separate military contracts, one for the US Army Corps of Engineers and one for the US Coastguard. Pollution control and environmental services are not a priority of armed forces in time of war but as US troops have left Iraq and are beginning to withdraw from Afghanistan, spending in those areas will likely resume. TTEK, with a proven ability to navigate the tortuous procurement process looks set to benefit. In addition, the company has renewed its focus on the oil and gas industry over the last few years. As the shale boom continues that is looking like an increasingly smart move and as the US pipeline network expands, so will TTEK’s domestic profits.
Whatever your political views, the fact is that as that pipeline network (and the fracking operations that it serves) expands, so does the chance that somewhere, sometime a major spill will occur. An investment in TTEK is not, like those Yen traders responding to an earthquake, a bet on disaster, but it does afford some prospect of appreciation if such a thing occurs.
Primarily, however, you would be investing in technology and expertise designed to reduce pollution on a day to day basis and that, surely is something we can all get behind.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
