Of all the Hurricane Sandy plays, it's clear that the building supply retailers are atop the list of beneficiaries. Most of the construction spending that has occurred and will occur post cleanup will be in repairs, and so investment capital should and is finding its way to building supply companies and supply sellers. But these stocks have had a good catalyst this year to begin with, and so could keep growing even after Sandy is but a note in history.
The disaster spending started even before Sandy stormed in, as homeowners and carpenters boarded up windows and bought supplies for preparation. But due to the path Sandy chose and the dense population of the affected region, with the storm affecting most of the East Coast and slamming into the New Jersey, New York City, Long Island and Philadelphia areas, the spending will continue in a significant way.
First and foremost, investors are wisely turning to the sellers of the vast range of construction materials that will be used to repair various types of damage. For this reason, and for good reason, the shares of Home Depot (HD), Lowe's (LOW) and Builders FirstSource (BLDR) were higher upward of a point Thursday. Builders FirstSource was up 6%, since much of the extensive damage will require the work of construction professionals versus do-it-yourselfers. Lumber Liquidators (LL) and Orchard Supply Hardware Stores (OSH) also benefited on the week.
However, the storm is a fleeting event that cannot sustain lasting demand, say beyond the next year or so. Still, these companies have had another catalyst, a finally improving real estate market. Demand for new homes is increasing, though from very low levels of activity post the real estate collapse. Furthermore, due to construction of both single-family and multi-family structures (some for rental) building supply retailers have been on the rise.
Chart by Yahoo Finance
With the end of the year so near, I prefer looking ahead to the forward earnings period for a better perspective of valuation and capital appreciation potential. The simple relative and absolute analytical metrics here tell a story. Two of the companies, BLDR and OSH, are not expected to post positive earnings in the forward period, and so we also look at price-to-sales for comparison. Because of their earnings perspective, those same two companies are priced cheaper on a price-to-sales perspective. But cheaper does not always mean opportunity; sometimes it simply reflects a relatively poor operation or opportunity. In this case, a closer inspection of LL and OSH, and maybe a dedicated report, would be constructive in discovering whether a special opportunity might exist in one or both of these.
Among the earnings producers, Lowe's offers the cheapest valuation on all metrics, including on the intrinsic valuation metric of the PEG ratio. Considering that the analysts' consensus EPS growth forecast for LOW's is 15.3%, versus 15.0% for HD, it would seem the outright choice as well. But will it benefit from business generated as a result of Hurricane Sandy? That will depend on its degree of operation on the East Coast and especially in the hard hit areas. We can see by this map of Lowe's store locations, it has a good concentration in the Northeast, as does Home Depot.
So, in conclusion, both the shares of Home Depot and Lowe's remain attractively priced even after their latest rise, but Lowe's may offer a better value. For portfolios in need of retail exposure, these two seem like must owns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.