Weekly Wisdom – December 20, 2023

By Hightower Great Lakes on December 20, 2023

Military and Cyber Terrorism

Companies across various industries from consumer discretionary to shipping are feeling the impact of bad actors across the globe. Attacks are being carried out via organized militias and digital hackers, both forms of terrorism on the international stage. Neither avenue of attack should be taken lightly, and both have significant financial and investment implications.

Container Ships Under Attack

The Russia-Ukraine war continues to emphasize the global importance for energy security. Houthi rebels targeting merchant ships are re-aggravating the fragility of international energy trade. The Houthis are a militant group based in Yemen but backed by Iran.

The militant group is using drones and missiles to attack merchant ships as they journey through the Suez Canal. This canal has been a crucial point for the global energy trade, especially since the start of the Russia-Ukraine War.

Europe used to get its refined petroleum products primarily from Russia but now leans more heavily on Middle Eastern countries due to the sanctions.[1] As a result, brent crude oil is up 3.5% since December 15.[2]

This disruption is causing shipping and energy companies like Maersk (AMKBY), BP (BP) and Hapag-Loyd (HPGLY) to re-route some of their ships around the Cape of Good Hope, which is located at Africa’s southern tip.

For reference, if a ship were to travel from Singapore to Rotterdam using the Suez Canal, the journey would take 26 days and it would travel approximately 8,500 nautical miles. If one were to use the Cape of Good Hope instead, the same trip would take 36 days or an 11,800 nautical mile journey.

This could impact energy and goods prices that rely on these shipping routes. Around 15% of European imported goods come from Asia and the Persian Gulf, which means most have historically traveled through the Suez Canal.

As of December 18,at least 32 out of the 50 ships that use the Suez Canal per day have been diverted to this alternate route.[3] The cost of this route change is estimated to be an additional $1 million per shipment.

Although there will be additional costs, shipping rates remain suppressed compared to the extreme levels that were seen during the pandemic. The United States announced a multinational naval force called Operation Prosperity Guardian in a joint effort to protect these merchant ships.

This operation is in collaboration with other nations, including the U.K., Norway and Bahrain. Two of the dominating forces who currently have a hand in the Yemeni civil war, Saudi Arabia and the UAE, have opted out of the naval force.

Chart 1: Cost Of Shipping on the Rise[4]

Domestic producers like Occidental Petroleum (OXY) or Chevron (CVX) are more insulated than multi-national peers, considering about 88% and 50% of each company’s respective revenues come from the United States.[5]

Exxon Mobile (XOM) is worth mentioning here as well considering it is now the largest player in the Permian Basin, the United States’ most oil-rich region. Companies like SLB (SLB) could also benefit, considering its “robust and steady activity,” focused on the Gulf of Mexico.[6] 

Chart 2: Brent Crude Oil Price[7]

Cyber Attacks on the Rise

2023 has been a record-breaking year for ransomware attacks. By October of this year, the total amount of ransomware attacks already exceeded numbers from 2021 and 2022.[8] By November, attacks grew +39% m/m and +110.4% y/y.[9]

Cyber-attacks have occurred in multiple industries and companies throughout the year – the list is quite long. Some notable mentions have been Johnson Controls International (JCI), VF Corp (VFC), Okta (OKTA), MGM Resorts (MGM) and Clorox (CLX). Not every company that experiences a cyber-attack is required to report the damage, so what we know may only be the tip of the iceberg.

Cyber-attacks leave a significant impact on business operations; MGM Resorts took a $100 million hit to its third quarter results. Clorox was forced to cut its quarterly revenue guidance to down -28% from the prior expectation of mid-single digit growth. Clorox’s supply chain was offline after the cyber-attack, leaving it unable to manufacture products at normal scale.

The expanding trend will put pressure on companies to increase spending towards cybersecurity and data protection. There are many cybersecurity companies in the industry. Two large players that we own are Fortinet (FTNT) and International Business Machines (IBM).

Fortinet’s integrated suite of FortiGate firewalls, FortiEDR endpoint detection and response solutions are in high demand as more companies look to protect themselves from increasing cyber risks.

IBM can benefit from its dynamic AI-powered security solutions and its vast consulting arm that helps organizations anticipate and thwart attacks. Other companies with a large market share include Palo Alto (PANW), Crowdstrike (CRWD), Zscalar (ZS) and Cisco (CSCO); all of which offer a critical service or product in the cybersecurity supply chain.

Cisco provides an interesting example as a legacy network infrastructure company that has reinvented itself, providing a more stable annual recurring revenue base of $24.5B. As part of this effort, the company recently purchased Splunk (SPLK), which collects and analyzes data and then provides cybersecurity offerings. The company has annual recurring revenue of $4B.

Chart 3: Ransomware Victims by Month[10]

Click here to read last week’s Weekly Wisdom (12/13).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: The Wall Street Journal. As of December 18, 2023.

[2] Source: Bloomberg. As of December 19, 2023.

[3] Source: The New York Times. As of December 19, 2023.

[4] Source: Bloomberg as of December 20, 2023

[5] Source: Bloomberg As Of December 19, 2023

[6] Source: SLB Earnings Call As Of October 20, 2023

[7] Source: Bloomberg as of December 19, 2023

[8] Source: Corvusinsurance.com. As of October 24, 2023.

[9] Source: Corvusinsurance.com. As of October 24, 2023.

[10] Source: Corvusinsurance.com. As of December 18, 2023.