So far it is estimated that 4,500 people have died from the Ebola disease, with estimates of a million people dying by January 2015. Mortality rates differ by country, varying from 25% to 90%. It is a horrible death that involves flu like symptoms that eventually turns into a hemorrhagic fever. So why are investors itching with greed at the prospect of people dying from this?
Where there is tragedy, there is opportunity. For example: if a firm specializes in making hazmat suits, they most likely make around the same number of suits a year. If there was to be a disease that puts the entire world into a frenzy, demand for these hazmat suits would skyrocket.
Lakeland Industries Inc (NASDAQ: LAKE) is experiencing this situation. The past month has been a roller coaster ride of share prices. Before the Ebola situation got really bad share price was steady between $4-5 dollars. Last week it peaked at over $32. This is an 800% increase in the valuation of the firm. The question is whether this 800% increase is representative of how much economic growth the firm will experience in reality. How many hazmat suits will this firm actually produce and sell in addition to their regular yearly revenue? The answer is probably not much. This company has a market cap of 80 million dollars currently, with shares resting at $15 dollars. This isn’t exactly a big company. Do they have the production capabilities, distribution connections, or even economically feasible products for large scale demand?
It seems that the company isn’t being valued at its actual performance level. It is a speculative stock. Investors may not believe that the company will experience long term gain, but they know that anytime a headline comes out that scares the public, the share price will jump. These “Ebola Stocks” (LAKE, APT, VSR) are all easy money for traders, but it just goes to show that while the company is “worth” 80 million, it is more likely worth 15-20 million dollars if you look at how the company was doing before the epidemic. The firms target share price (Usually very generous) is only about 7 dollars.
Food For Thought: What are the moral implications of investing in companies like this? Investors are pretty much directly hoping people die so that they can profit, is this okay and if not how should it be regulated?
4 Comments
Your moral question is an interesting one. Those who would like to invest in such companies can take the stance that investing in companies that indirectly are profiting from Ebola will be profiting with our without your investment.
At the same time the companies such as the producers of hazmat suits are actually aiding the effort against Ebola by providing gear that prevents the spread of the disease. The logic is slightly counter intuitive.With the same logic in your question used above could we really say that hazmat production companies are directly hoping people will die while they are selling a product that has a distinct purpose to do the opposite.
Well, what is the elasticity of demand like? The Lerner formula suggest that such firms might enjoy extremely high profits for a while. That makes (prospective) stock pricing a challenge – if “for a while” is a couple years, then today’s price could be too low, not too high.
It is an interesting moral question, whether or not people should invest in these companies, at least in the short term, to take advantage of global sickness. Many people have trouble investing in morally questionable stocks or “sin stocks”. Companies like Philip Morris, Altria Group, and Smith & Wesson often deter investors who don’t want to profit for the wrong reasons. The same issue clearly exists here, as investors may not feel comfortable seeing LAKE’s stock price shoot up as Ebola spreads and deaths increase worldwide.
The Ebola death toll is now over 5000 yet APT is now trading at 2.86. LAKE at 11.46. It seems that the ebola stock fad is now over. But buying now may mean serious profit if a bad news story is released.
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