Replies to post #23 on Distributed Energy Systems Corp. (DESC)

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DESC: Hedging Against A Bird Flu Pandemic
Kenneth Reid, Spear's Security Industry Analyst 06.16.06, 1:20 PM ET

SANTA FE, N.M. - In May, the eyes of the world focused on a small village in Indonesia where the most publicized family cluster of the lethal H5N1 avian flu infection occurred, causing seven deaths. Despite multiple opportunities for the virus to spread to other family members, health care workers or into the general community, it has not apparently done so.

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Based on an assessment of present evidence, the World Health Organization has concluded that the current level of global pandemic alert (Phase 3) is appropriate. This phase describes a situation in which occasional human infections with a novel influenza virus are occurring, but there is no evidence that the virus is spreading in an efficient and sustained manner from one person to another.

We are encouraged by these results and the professionalism with which the World Health Organization is handling the situation. That said, the moment the WHO shifts the alert level to Phase 4, expect a literal overnight collapse of the Asian markets similar to the currency crisis of 1997. That crisis started in July 1997 in Thailand, but it caused a global financial domino effect. That is what we are looking at with a Phase 4 warning. Keep yourself informed by monitoring updates at the WHO Web site.

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Should such a scenario develop, the vast majority of stocks would decline, which is why we have suggested a December put option on the Standard & Poor's 500 index as a hedge. Buying puts, or selling covered calls, is a simple way to protect equity assets with a defined risk. Leveraged bear funds, such as those from Rydex and Profunds, are also an option. These funds rise in value as the major indexes fall. With respect to hedges, it is better to get in early.

If a Phase 4 warning were to be issued, the direct avian flu plays should do well immediately. These include Novavax (nasdaq: NVAX - news - people ), BioCryst Pharmaceuticals (nasdaq: BCRX - news - people ) and Crucell (nasdaq: CRXL - news - people ), along with influenza diagnostic companies Meridian Bioscience (nasdaq: VIVO - news - people ) and Cepheid (nasdaq: CPHD - news - people ).

Most other stocks are likely to plummet due to media shock. After the initial selling wave has passed, however, bargain hunters will arrive, and we expect there will be a group of companies that quickly rebound once investors realize that their businesses will thrive in a national bio-emergency, assuming the companies can maintain manpower services. That is a big assumption, but it is worth sketching out a shopping list.

In the health care field, one such favored company is Stericycle (nasdaq: SRCL - news - people ), a provider of medical waste management and infection control supplies. Another is Lincare Holdings (nasdaq: LNCR - news - people ), which offers home health supplies such as oxygen. A third is Quest Diagnostics (nyse: DGX - news - people ), a general medical lab.

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Branching out to more general business categories, video conferencing outfits like Polycom (nasdaq: PLCM - news - people ) are likely to rally. Ebay (nasdaq: EBAY - news - people ) and other shopping services should do well. Emergency communications outfits like Comtech (nasdaq: CMTL - news - people ) and Relm Wireless (amex: RWC - news - people ) are likely to thrive.

Supplemental automated remote security providers such as Verint Systems (nasdaq: VRNT - news - people ), Nice Systems (nasdaq: NICE - news - people ) and possibly Magal Security (nasdaq: MAGS - news - people ) should see business increase.

Distributed power companies such as Metretek (amex: MEK - news - people ) and Distributed Energy Systems (nasdaq: DESC - news - people ) will be in high demand, and even select solar providers might do well.

We would also watch companies with very high revenue-per-employee figures, such as Google (nasdaq: GOOG - news - people ), and companies with high book value, such as resource companies. Natural gas provider Encana (nyse: ECA - news - people ) is a leader in both categories.

What are the chances of a pandemic? How lethal might the mutated strain be? How easily passed? How effective would the current anti-virals be? We honestly don't know, but we assume that government and WHO health officials will always downplay the seriousness of the situation to avoid sparking pandemonium on top of pandemic.

We therefore believe it is prudent for individuals to acquire anti-viral medication at this time. Given supply shortages and the long lead times for manufacturing, it will probably not be available during a pandemic in the 2006 to 2007 time frame.