I hope that everyone's family and friends are safe after the unprecedented Hurricane Sandy that demolished the Northeast. The brunt of Hurricane Sandy is in the past but the cleanup will last for weeks. Early estimates of financial damages are in excess of fifty billion dollars. The human cost of the hurricane is very real and all should take a moment to reflect upon the catastrophic loss of life. The market is poised to finally reopen on Wednesday and this could be one of the wildest trading days in recent memory. Not only is there significant financial data to digest but there are many companies that will benefit from the storm. On the other hand, there are significant business segments that will suffer from damages and important revenue opportunity costs. I want to utilize this article to provide actionable investment advice to guide your trading when the market reopens. Below I present three groups that could capitalize on the natural disaster as well as three that may decline precipitously.
Hundreds of homes in the Northeast were completely destroyed while others were significantly damaged. The reality of the situation is that it will be necessary to rebuild many homes. Some of homebuilders such as KB Home (KBH), Lennar Corp. (LEN), and Toll Brothers Inc. (TOL) should benefit from an unexpected revenue increase. Separately from the obvious storm benefits, housing has been slowly improving and resales are inching higher. A more diversified approach would be a homebuilder ETF such as SPDR S&P Homebuilders (XHB); however, the fund has holdings such as Whirlpool (WHR) that will not receive immediate benefits from the rebuilding. I recommend researching the three corporate opportunities above and making a direct investment rather than resorting an imperfect ETF.
Recovery and Rental Companies
Generac Holdings Inc. (GNRC) is one of the most logical Hurricane Sandy plays as the company sells the generators that provide invaluable energy. The stock has already climbed nearly nine percent this week and twenty-four percent this quarter leading up to the storm. Despite the increase I still believe there is still an investment opportunity here. As New York governor Andrew Cuomo stated, "I told President Obama, we have a hundred-year flood every two years." As this new reality settles in the Northeast I expect the short-term boost in sales to evolve into a genuine part of life for residents. Note that Generac reports third quarter earnings tomorrow but the results are largely irrelevant given the positive headwinds for the company.
A related play is United Rentals Inc. (URI) which is the largest equipment rental company in the United States. I have been long URI for quite some time during the recession as I believe it is well positioned to capitalize on the economy recovery. There are excellent articles on Seeking Alpha which analyze United Rentals and provide a strong overview of the company, independent of Hurricane Sandy's impact. URI's two business segments include general rentals (construction, industrial, and homeowner equipment) and trench safety, pump, and power (underground construction and temporary power). As you can imagine both of these categories are vital due to the storm damages and URI will capitalize.
For the third group of winners I want to make a more speculative pick that may be less obvious - auto companies. General Motors (GM) and Ford (F) both came out to say sales would be negatively impacted by the storm but I believe they may just be tempering expectations. October sales were predicted to be strong before the storm and should still hold up well despite a late month hiccup. The Wall Street Journal has an excellent article that describes the intricacies of the market that can be summarized by stating that many leased cars in the disaster area were damaged and will need to be replaced due to the sophisticated electronics inside. GM was on an amazing run earlier this summer in which it ran up from $19 to nearly $26 and I would not be surprised if the stock makes a quick ten percent recover. I would wait until later this week to open a long position paired with covered calls (December 2012 $25s are at $.50) as I expect the stocks to stumble in early trading.
The most logical sector to sell immediately on Wednesay is the insurance industry and it is difficult to find flaws in the argument. Often times the commonsense decision is the best one. Companies including Allstate (ALL), Chubb (CB), and Tower Group (TWGP) are some of the leading insurance companies that could be on the hook for over ten billion dollars in insured losses. Based upon the damages and declines suffered in the aftermath of Hurricane Irene I would strongly consider selling any insurance company holding and avoid this group for the near-term. John Stirling, Bernstein analyst, recommended Chubb as an "opportunity" but I believe there will be indiscriminate selling this week and I would at least exercise restraint before initiating a long position.
Discretionary Luxury Retail
Everyone was busy purchasing batteries, water, and other consumer staples this weekend while Macy's (M), Saks (SKS), and Tiffany (TIF) were shunned. There is the possibility that holiday sales may be impacted as consumers need to shift spending towards disaster recovery; I expect these names to fall in early trading on Wednesday. These may be attractive opportunities if they pullback in excess of five percent but I would generally stay away for now.
Regional Utility Companies
Consolidated Edison (ED) is one of the largest utility companies in the New York tri-state disaster area and faces the largest cleanup effort in its history. The company will face millions in expenses and face substantial lost revenue. Other potential utility losers include FirstEnergy (FE), Pepco (POM), PECO (EXC) and Northeast Utilities (NU). Pepco could be the biggest loser of the bunch as its Atlantic City Electric subsidiary accounts for 25% of total customers. Atlantic City appears to be the area facing the most devastation so I would strongly consider selling Pepco. The entire group will likely drop a few percent on Wednesday but long-term should recover.