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Hurricane Stocks are Overblown

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In August of 2011, Hurricane Irene caused over 50 fatalities and more than $19 billion in damage.  It is considered one of the biggest and most destructive hurricanes in United States history.  Hurricane Sandy just recently hit the United States, and is considered to be much larger in scope, has caused over 60 fatalities (expected to go higher), robbed 8 million people of power, shut down major metropolitan areas like NYC and Washington DC for the past few days, and is said to have caused well over $20 billion in damage.  Like last year and any other major hurricane year, you will hear which stocks to invest in to capitalize from the disaster recovery.  In my opinion, hurricane stocks are overrated and overblown.

Hurricane Stocks

The classic hurricane stocks that are mentioned first by most analysts are retail home improvement companies like Home Depot (NYSE: HD) or Lowe’s (NYSE: LOW).  I talked about both companies, as well as my personal favorites within the sector, in a previous article here: Home Improvement Article.

Home Depot has seen its share price go up over 90% since Hurricane Irene, while Lowe’s has gone up over 60%.  Is this all because of Hurricane Irene though, or could it possibly be something to do with the economy that just might be improving?  Hurricane Katrina, the costliest natural disaster in US history, with over $100 billion in damage, hit the United States in August of 2005.  In the year after that hurricane, Home Depot dropped over 17% and Lowe’s dropped nearly 10% in share price.  Maybe people weren’t fans of either home improvement store back then.

<img src="http://media.ycharts.com/charts/39fc97e0ea0d3e82e652eb276fca4244.png" />

HD Total Return Price data by YCharts

<img src="http://media.ycharts.com/charts/8974536f5a245a500482118c2fc430d5.png" />

HD Total Return Price data by YCharts

I also heard about investing in General Cable Corporation (NYSE: BGC).  For the unaware, BGC is involved in the development, design, and manufacturing of copper, aluminum, and fiber optic wire for cable products in the energy, industrial, construction, and communication markets.  If there are trees falling on cable lines or if there is large scale damage to communication wires, there is a good chance that BGC is somewhere in the profit path.  If you again look at Hurricane Irene in last August, BGC went up 15% from August 2011 to present day.  If you look at the 5 year history of BGC, however, the stock has dropped over 57% in share price.  BGC doesn't seem like such a good long-term play, but you would never know it until you researched further.

<img src="http://media.ycharts.com/charts/13d6dc66755c8066dfd8c350eff6751a.png" />

BGC Total Return Price data by YCharts

You might hear about some newer stocks that cover the retail generator market – specifically residential generators that homeowners can go buy for $500-600 a pop.  There were even some news anchors advertising how smart they were in having purchased one earlier this year on live television. 

Generac (NYSE: GNRC) is a relatively new company to the stock exchange, but has a long history going back to 1959.  It might seem like a straight forward buy after hearing news channels talk about how all these stores are now sold out of generators, but it really isn’t.  The IPO for GNRC provided $224 million in proceeds to pay down debt.  If you look at the latest financials for GNRC, they still have over $875.5 million in long-term debt, versus just over $10 million in total cash.  This year alone, GNRC has gone through several agreements to extend debt to as far as 2018.  In my opinion, this doesn't sound like a company that is making mad money.

<img src="http://media.ycharts.com/charts/c4fbe3e2dd0615271445328aa6da1519.png" />

GNRC Total Return Price data by YCharts

Other stocks that are commonly mentioned fall in the construction sectors and may be as straight forward as the $50 billion+ market cap giant Caterpillar (NYSE: CAT), or as less obvious as companies like Briggs & Stratton.  Caterpillar is a major supplier of construction equipment ranging from engines to mining equipmen,t and will clearly be asked to assist in the disaster recovery.  Briggs & Stratton is a much smaller construction-related company and designs and manufactures outdoor power equipment.  Of the construction sector, I would recommend CAT simply because it is much larger and has shown to be much more profitable.  Over the past 10 years, CAT has delivered over 400% total share price returns and has consistently increased its dividend.  When it comes to the construction industry, size does matter.

<img src="http://media.ycharts.com/charts/b13035eadf00283042db6388c8182c7e.png" />

CAT Total Return Price data by YCharts

Eye of the Hurricane

The fact about Hurricane Sandy or Hurricane Irene or any other natural disaster is that nothing is completely correlated to any one, or group of companies.  If anything, I’d be more interested in looking at the $40 billion media mammoth Time Warner that is the parent company of CNN.  Even though CNN’s ratings soar during disasters or big news of any kind, the relationship between CNN and Time Warner is very similar to the relationship with a hurricane and with any major publicly-traded company that might be involved in recovery efforts.  CNN is a small part of Time Warner.  A hurricane is a small part of any company’s revenue stream. 

While hurricanes are indeed serious and have drastic consequences to the lives of millions and require large sums of money for recovery, the money is so dispersed that no single entity profits from it.  Hurricanes and other natural disasters aren’t to be confused with man-made disasters like the Deep Horizon BP oil spill of April 2010.  If you had invested on the drop from that event, you would be up over 50% in total returns on BP to this day.

Lessons Learned

Warren Buffet famously said, “…investors should remember that excitement and expenses are their enemies.  And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”  If everyone on television and online is saying how much all these hurricane stocks will benefit from Hurricane Sandy or any other future natural disaster, maybe it is time to be fearful of those particular equities or sectors.  Instead, maintain your plan with your current positions.  Don’t ignore the news like the recent management shakeup at Apple over the refusal of product leaders not signing a letter of apology over deficiencies of the iOS 6 mapping application.  Don’t ignore up-and-coming publicly traded stocks like refinery king Phillips 66, which went public earlier this year and has seen its share price go up over 40% already.

Don’t let the hurricane cloud your investment strategy.

Interested in Additional Analysis?

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mikecart1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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