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In Sandy's Wake-Finding the Real Winners and Losers for a Volatile World

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

If there’s one thing that hurricane Sandy seems to have brought back to the forefront of everyone’s mind, besides the horrific losses of life, it’s climate change and natural disasters. Never mind the record breaking heat, drought and wildfires of the past two summers, leave it to a hurricane to always remind us of climate change. Even NYC Mayor Michael Bloomberg, in the wake of Sandy’s destruction, cited climate change as a major reason for his endorsement of President Obama.

But this is not, I repeat is not, a political article. So please, save any overtly partisan comments you were going to leave me below. The climate is changing and the weather related disasters we experience are rising. I don’t have the slightest clue if the recent extreme weather we’ve experienced has any correlation to climate change. I just know the weather is getting more extreme and the disasters more costly, look at the chart below courtesy of NOAA that tracks the rise in billion dollar disasters, keep in mind this doesn’t include Sandy or the tornadoes in the Midwest this year.

<img height="291" src="http://icons.wxug.com/metgraphics/angela/billion_dollar_wx_disasters_2011.png" width="614" />

What’s also struck me as interesting in the wake of Sandy is that people have all of a sudden realized this is an investable trend and indeed, it is. It’s a long term trend that you want to be on the right side (hence my snappy nickname) of.

But you don’t want to buy shares in the most simplistic ideas I’ve heard floated around. For example, many are saying to buy the Home Depot (NYSE: HD) or Lowe’s as a play on climate change. Yes, in the wake of Sandy people will need new carpet, new appliances, but what happens afterward? If I’m investing in a “theme” I want a business that’s impacted only by that theme. HD is, but it’s also impacted by the economy, housing trends and people’s general preference in retailers.

If you’re inclined to go this route, go with one of my personal favorites Beacon Roofing Supply (NASDAQ: BECN). Beacon a play on a housing recovery just like the retailers but it only deals in roofing, which is the top residential insurance claim after these types of disasters. It supplies its products to businesses and homeowners and was profitable through the housing downturn because it profits in all environments. Be it a good housing market, rehabbing foreclosures in a bad market and of course from super storms (tornadoes, hurricanes, etc.), BECN profits. It’s also a small cap and a fast grower, so you’ll have much more upside than in the slow growing world of HD and Lowe’s. Do you really think a hurricane is enough to move the needle on those behemoths? No.

Other Winners and Losers

Before I get to my two favorite plays in this area, I want to discuss one area I’m absolutely not touching, a huge loser; and that’s residential insurance carriers such as All State and Progressive (NYSE: PGR). Not only do these companies have to pay for the messes these disasters create, they’re in a no win situation because the only answer for them to make a profit is to raise rates.

When it comes to residential homeowners and auto insurance, raising rates on a consumer who has been through a disaster is a very emotional thing so it’s done reluctantly. This is even as costs for the insurers rise as the National Claims Journal cites a nearly 200% rise in the severity and frequency of residential homeowners insurance claims through 1990-2011, with a 27% rise in 2011 alone! These companies are also a bit of a commodity, they all offer the same service, so if one company raises rates then others will try to undercut them; that’s margin pressure you don’t need.

There is no good way for them to increase profits if these disasters continue, and what do you think they do with the money they collect from premiums? In most cases it goes into a “safe investment” like bonds or CD’s. Now you tell me, with margins squeezed and QE3 guaranteeing meager bond returns, where does Mr. Insurer make his money? He either a). doesn’t or b). decides to invest shareholder money in something more risky. No thanks.

Buy the Seed-Harvest the Trends

When it comes to climate related disasters, everyone thinks of hurricanes (call it the “Katrina Syndrome”), what’s often overlooked is how summer heat records lead to wildfires and drought. In fact, the U.S. has seen (from 2010-2012) the worst droughts throughout the country since the Dustbowl. This is horrible news for farmers, but it sure is good news for Monsanto Co. (NYSE: MON). Monsanto, which holds huge market share in seeds from corn to cotton keeps developing seeds that need less and less water and are thus, more drought resistant. The company has shown strong growth over the past five years with earnings and dividends growing 18% and sales growing at 10%, annually.

Furthermore, Monsanto is a play in the long term trend of an overpopulated planet (7 billion!) with too many mouths to feed. In fact, if you’re a “worrier” at heart and fear the planet is becoming overpopulated and unstable—how do you not own Monsanto already? It has headline risk (someone’s always trying to sue them) but it’s the best long term play I can think of on two can’t miss trends.

The Nerds Shall Inherit the Earth

While Monsanto may be the best play on those two trends the best outright play on climate change is a company you’ve probably never heard of. Small cap, Exponent, Inc. (NASDAQ: EXPO) may only have a market cap of $745 million right now but that is almost destined to rise. It’s the flip side to my loathe of insurance carriers, I love Exponents nerds (Engineers and Scientist) who are already so in demand. Exponent focuses in solving disputes between attorneys and insurance carriers with their insured.

In short, with all those claims that the insurance companies will dispute, they need experts, that’s where Exponent comes in. They can tell, through their forensic analysis if a roof collapse was caused by hail damage or if it was staged and much more. With insurance carriers pinching pennies to squeeze a profit, can you think of a more needed play on this trend? No.

Exponent is not an unknown to those in its industry, its profits reflect that. It recently blew away quarterly earnings by 20%, just a smidge below its 5 year average of 21%. With that said, it’s trading near a 52 week high, but if you believe these extreme weather events continue, today’s share price (around $53) might be the best value you’ll see.

A Final, Foolish Thought on Strategy

“Buying individual stocks without having any idea of what you’re looking for, is a bit like running through a dynamite factory with a lit match. You may live, but you’re still an idiot”-Joel Greenblatt

The devastation of hurricane Sandy has everyone thinking about climate change again, but extreme weather trends have been increasing for years. As an investor, I truly believe your best bet is to sit down before you buy your first share and consider what you think the long term bullish themes of the future will be. Find the ones that are a given, the ones that don’t rely on the economy or consumer fads and get behind them.

What I don’t recommend is after a Hurricane running out to buy a stock just because you think it will see a bump for a few short months. That’s not strategy, its speculation; and if you didn’t know what you were looking for before the hurricane, you’ll almost certainly see your plan blow up.

Adem Tahiri owns shares of Monsanto Company. As of this writing he had no plans to add to or sell his position in the next 72 hours. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot and Monsanto Company. 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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