Mother Nature Picks Wall Street Winners and Losers
Last week was a rough one in the Northeast. Between the ground-rattling earthquake and the wet and windy savage fury of Hurricane Irene, natural disasters rocked the heavily populated region.
The wide-reaching storm left death and destruction in its wake. And while this hardly seems like the right time to think about the investing implications behind natural disasters, the exchanges don't wait for everyone to have electricity restored before separating the winners from the losers in the equities market.
The stock market can be ruthless. Some stocks get pummeled when disasters strike, while others climb higher.
Just as homeowners go through the frenetic process of fortifying their homes with plywood shutters and bracing for the downtime with bottled water, flashlight batteries, and Sterno burners, investors can also make sure they protect their portfolios from the implications.
As respectfully as I can be given the circumstances, let's go over the stocks to avoid -- and the ones to own -- before the next natural disaster rolls around, using the gusty and gutsy Irene as our guide.
Where the Losses Are Substantial
Estimates vary when it comes to the financial damage caused by last week's storm, but most indications suggest it will be in the billions.
Homeowners won't be on the hook for most of this. The real losers here are the property/casualty insurers, which will be hit with countless claims over the next few weeks for damaged homes and wrecked cars that will need to be repaired or replaced. They'll find a way to use the storm as an excuse to jack up rates -- bad for homeowners, but good for the industry in the long run. But do you really want to take that kind of chance with your portfolio? Some homeowners will be shocked to learn that flood damage coverage isn't part of their policies, but there will still be hefty tabs for the insurers to pay.
Investors won't want to bail out of the entire insurance industry. Life-insurance specialists, for example, aren't losing sleep over their actuary tables. It's business as usual there.
Another problematic sector will be financial services. Banks were already fretting about the homes on their books that are worth less than the outstanding mortgages. If too many homes were figuratively underwater, then imagine how badly values will sink now that many are also literally underwater.
The travel industry also misses out, with a wave of cancellations. AirlineForecasts LLC estimates the country's 10 largest carriers lost as much as $300 million because of the grounded flights. This is essentially a one-time hit, but the cruise lines may not get off that easily. Private Caribbean islands owned by Royal Caribbean (RCL) and Norwegian Cruise Lines suffered storm damage, initially impacting some itineraries.
Closer to home for landlubbers, one can imagine that there hasn't been a whole lot of mall shopping, theater-going, or restaurant dining in the Northeast over the past few days. Expect more than a few consumer-facing leisure companies to blame Irene for any potential softness during the current quarter.
Companies Riding the Tailwinds
If you want to find the winners, just follow the money.
Home Depot (HD) and Lowe's (LOW) are the obvious winners. The home improvement chains profit from the aftermath of a storm. The retailers also cash in as worrywarts stock up on power generators and plywood to protect their homesteads in anticipation of the hit. I took a closer look at the recent performance of both do-it-yourself chains this week.
The insurance claim buck doesn't stop there.
Sponsored Links
If falling trees and flying lawn furniture wrecked patios, wood-alternative decking giant Trex (TREX) will be a winner. If flooding ruins aging hardwood floors, Lumber Liquidators (LL) has plenty of planks to sell. If structural damage is significant, Builders FirstSource (BLDR) will also be busy.
Good news for Detroit: A totaled car is an insurance check away from becoming a new automobile purchase.
This isn't just a playbook for a storm that has come and gone. These are the names that investors should be researching the next time a named storm closes in.
More to Come, Unfortunately
It's already been a busy storm season. The National Weather Service claims that Irene is the 10th U.S. weather disaster to cause more than $1 billion in damage this year. We're only up to Irene on the hurricane calendar, with another two months of potential activity to come.
As homeowners and renters, we know the importance of preparing for natural disasters. It's probably sage advice for investors, too.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services have recommended buying shares of Home Depot, Lumber Liquidators, and Lowe's, as well as writing covered calls on Lowe's.
