Stocks to Benefit From Conflict in Korea
WINDERMERE, Florida (Stockpickr) -- To Wall Street, wars mean economic disruption and uncertainly, and the financial markets really hate uncertainty.
"Uncertainty" could be North Korea's middle name after the events of the past week. On Tuesday,
North Korea and South Korea exchanged artillery fire
after the North shelled the South Korean island of Yeonpyeong.
According to reports, the conflict started because North Korea didn't like some of the South Korean military drills that were taking place on the island. On Sunday, the
U.S. and South Korea launched joint military exercises
in the Yellow Sea, just west of the Korean peninsula.
The rhetoric from the North has already started to grow more intense, with the rogue nation claiming that the peninsula is on the "brink of war" and threats of a "shower of fire."
This is not the first time that the North has either started or been suspected of a serious provocation this year. A South Korean warship was sunk by a torpedo attack back in March that killed 46 sailors, and many military analysts believe that North Korea was behind the attack. This newest move by the North is an escalation of tensions that already exist on the Korean peninsula.
Due to the uncertainty created by the North's actions, combined with the growing European debt problems, U.S. equity markets sold off sharply on Tuesday. The
Dow
finished down 142 points, or 1.3%, at 11,036, and the S&P lost 17 points, or 1.4%, to 1181. In the face of uncertainty, the trades that work are the flight-to-safety trades: Think gold with the
SPDR Gold Trust
(GLD) - Get Report
and the gold miners with the
Market Vectors Gold Miners ETF
(GDX) - Get Report
. Also, the U.S. dollar as represented by the
PowerShares DB US Dollar Index Bullish
(UUP) - Get Report
should see a lot of inflows as traders run toward the safety of greenbacks.
>>Also:
4 Defensive Stocks to Pad Your Portfolio
Here's a look at a number of stocks that could be solid plays off a
or major conflict in Asia.
The long gold and long dollar trade will be the big winners if this conflict in Asia does materialize into something more serious than it already is. And even though a strong dollar usually takes gold down, that correlation will probably decouple if a major war does break out. I would expect other commodities, such as oil, which you can play with the
United Sates Oil Fund ETF
(USO) - Get Report
, and natural gas, which you can own through the
United States Natural Gas Fund ETF
(UNG) - Get Report
, will also catch a bid and head much higher if things get worse in Korea.
>>Also:
5 Market Leaders to Keep an Eye On
Another strategy I strongly recommended deploying in this environment is to look for stocks that don't go down on big down moves like we saw on Tuesday. One of the reasons I love to see a sea of red on my trading screens is that it makes it very easy to identify which stocks the big money isn't willing to let go of, or which stocks are being scooped up despite the troubling geopolitical news. If institutional traders aren't willing to sell a stock when the rest of the market is unraveling, then it could mean that the name is filled with strength and trend momentum that could last for a very long time.
The leading stocks that refused to trade lower on Tuesday include the following:
Tesla Motors
(TSLA) - Get Report
,
Salesforce.com
(CRM) - Get Report
,
SanDisk
(SNDK)
,
Children's Place Retail Stores
(PLCE) - Get Report
,
Netflix
(NFLX) - Get Report
,
Riverbed Technology
(RVBD),
Sodastream International
(SODA) - Get Report
and
Luluemon Athletica
(LULU) - Get Report
. I highly recommend that that you make a list of the stocks that don't go down on big down days, especially any down days that are caused by concerns in Korea.
>>Also:
20 Stocks With Large Insider Selling
Some of these companies, such as Lululemon and Tesla Motors, sell products to sophisticated affluent consumers who might not care what happens in Asia. Clearly the market is telling us something since these stocks weren't affected like the rest of the market.
Netflix could easily win off a global conflict since consumers might decide to spend less when going out and simply stay at home and still enjoy a movie. Netflix is the greatest strong/weak economy play I think I have ever seen. Is there any environment that this company won't thrive in? I can't imagine one at this time, and the stock seems to never go down for long.
>>Also:
Look for companies that have the characteristics of a Netflix, because they could be the big winners off a Korean conflict that changes the economic dynamics of the world.
I would start with these names I have mentioned above. Anything short of a nuclear war could mean that these stocks continue to see hedge fund and institutional money manager demand and interest.
Another way to play a potential and more serious Korean conflict is with defense stocks. In fact, I would recommended watching how defense stocks act for clues to whether the conflict on the Korean peninsula is going to get more serious. The major defense stocks will be the play if things heat up from a military standpoint in Korea, because a ground and air war would deploy some serious hardware.
One name to put on your list is
Lockheed Martin
(LMT) - Get Report
, the maker of F16 and other fighter jets, missiles, missile defense systems and reconnaissance aircraft. This defense player is so entrenched in the warfare market that I can't really think of a better play for a major global conflict. Let's not kid ourselves, either; if a major conflict in Korea did get under way, it would almost certainly drag every superpower nation, such as China, the U.S. and Russia, into the mix in some way.
>>Also:
Stocks to Bet on the Buyback Frenzy
Another play is
L-3 Communications
(LLL) - Get Report
, the sixth largest defense company in the U.S. and one of the leaders in intelligence, surveillance and reconnaissance, secure communications and aircraft modernization and maintenance. This defense contractor is also leading supplier of guidance and navigation products and systems.
I can't even imagine the amount of intelligence-gathering that is going on right now in South Korea with the help of the South's biggest military ally, the U.S. It's estimated that the U.S. has over 28,000 troops in South Korea, and you can bet that many of those troops are intelligence specialists using L-3 products right now to gain an information edge.
>>Who Owns L-3?:
Raytheon
(RTN) - Get Report
could also see significant gains. This defense company provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems, as well as a broad range of mission support services.
Raytheon could win some big orders for its Patriot Air and Missile Defense Systems, the world's most advanced air and missile system. This system is already being used in South Korea, so imagine if the need for more technology, hardware and services did escalate out of Korea.
>>Who Owns Raytheon?:
Let's all hope that nothing major breaks out in Korea because it does have the potential to lead to a world-war-type conflict. But it never makes sense to invest on hope, so remain a realist and play the market for what is happening, not for what you hope doesn't occur.
To see more stocks that could make you money if the conflict in Korea get worse, including
Flir Systems
(FLIR) - Get Report
,
TriQuint Semiconductor
(TQNT)
and
Northrop Grumman
(NOC) - Get Report
, check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.
