The upcoming Atlantic hurricane season looks to be a doozy, with forecasters predicting a 70% chance of 11 to 17 named storms.
Though hurricanes may be more predictable than the stock market, here's one way to play the storm stocks.
Storm Market 101 suggests that you should buy hardware stocks and short insurance. The first stock storm traders generally turn to is Home Depot Inc. (HD) , where many people go to stock up on supplies both before and after the storms hit. The stock may prove to be a good value, anyway, as it has been outperforming the retail market overall.
Joseph Feldman, an analyst at the Telsey Advisory Group, said an above average hurricane season has historically benefited home improvement stocks like Home Depot.
"They've generally benefited from increased sales, which can become an increase in the share price," Feldman said.
You should also watch Lowe's Companies (LOW) and Costco Wholesale Corp. (COST) in the hurricane season. Though weather conditions may be uncertain, it's a sure bet that shoppers will stock up on home improvement staples and food supplies, especially if they can buy in bulk.
Feldman said grocery stores generally do well during the hurricane season even if sales are disrupted during a major storm because people go food shopping afterward. In addition to Home Depot and Lowes, watch companies like Kroger Co (KR) and Wal-Mart Stores Inc (WMT) , he said.
Another expert said the common wisdom may not prove true.
"In my opinion, a forecasted above [average] hurricane season will not [affect] share price," BTIG analyst Alan Rifkin told TheStreet in an email. "And even if a hurricane materializes Home Depot is so diversified that the effect would be de minimus."
Even though stock prices might go up during the hurricane season, they often go back down even further, so good timing is an important element in buying stocks during stormy weather. Between the start and end of last year's hurricane season, Home Depot, Lowe's, Kroger, Wal-Mart, and CostCo all went down.
The biggest loser was Lowe's, which went down 17%, followed by Kroger at 15% and Home Depot at 9%.
In any case, don't sell your new stocks right after the storm ends. A CNBC analysis last year found that selling stocks like Home Depot and Lowes five days after a storm is a losing strategy if you bought the day before the hurricane hit. To optimize your chances, they found, you should also buy only before the largest storms.
The other element of your storm trade strategy could include shorting insurance stocks. Stocks such as Allstate Corp. (ALL) and Progressive Corp (PGR) may take a beating once anticipation for stormy weather sets in, all the worse if the storms look to be large.
There's an element of pickiness when it comes to which insurance stocks you want to short, however. The insurance stocks that will fall the most will be the least geographically diversified, and therefore the most at risk from colossal property destruction.
Last year, in anticipation of Hurricane Matthew's landfall in Florida, the biggest insurance company losers all had most of their operations in the area. The hardest hit was Fort Lauderdale, Fla.-based Universal Insurance Holding Corp (UVE) . That stock fell more than 15% in a single day.
As always, shorting stocks is risky, and even more so when it's based on weather predictions. If the storms prove to be smaller than anticipated, this bet could lose big.
Finally, as we wrote two years ago, Generac Holdings Inc (GNRC) could be a smart bet. The company is the largest U.S. producer of backup generators, with a 70% share of the market. If hurricanes damage electric lines, Generac stands to gain. The only other publicly traded company with a substantial market share for backup generators is Briggs & Stratton Corporation BGG. Both Generac and Briggs are highly volatile stocks, so be careful.