‘Frankenstorm’ Churns Out Investing Opportunities

by Lawrence Meyers | October 29, 2012 10:37 am

‘Frankenstorm’ Churns Out Investing Opportunities

It might be unseemly to hope for tons of property destruction, but the fact is that whether they hope for it or not, it won’t change the outcome. And in those cases where there is a lot of property damage — as it looks like will be the case with Hurricane Sandy — it’s worth looking at trading opportunities, particularly in stocks that also make for good long-term investments.

Insurers are the first area to look at. A huge storm can put a dent in an insurer’s near-term earnings, but that should be viewed as a buying opportunity after the stock drops from weak holders. Insurance is a great business. If it weren’t, the free market would’ve killed it ages ago. Underwriting is now so nuanced and refined that insurers know more about risk than you ever could.

Berkshire Hathaway (NYSE:BRK.B[1]) is the obvious big play, and you get the diversification of Warren Buffett’s holding company to boot. As a conglomerate, trading at 16 times earnings is not a bad deal at all. Berkshire’s insurance underwriting business actually lost $830 million in the first half of last year, and it presently sits on a $675 million profit. It’s hard to say how exposed it’ll be here, but this is a long-term hold, so if you are considering it, you might as well buy in after Berkshire announces how hard it got hit.

Allstate (NYSE:ALL[2]) rests on the cheaper side of insurance companies, trading at 9 times earnings, and it also pays a 2.2% dividend. Allstate offset its own $1.17 billion first-half underwriting loss from last year with $657 million this year.

The other area where stocks might see a pop are home-improvement stores. In this sector, it’s tough to do better than Home Depot (NYSE:HD[3]). After all these years, the company continues to grow impressively, with long-term growth rates at 15%, and trading at 20 times this year’s estimates. That’s not outrageously expensive when you consider that the company churned out $5.43 billion in free cash flow last year, and already has produced $3.7 billion in the first half of this year. It’s a solid buy for the portfolio, even with Hurricane Sandy bearing down.

You also can consider Lowe’s Companies (NYSE:LOW[4]), which similarly is pegged at 15% long-term growth, although this year is expected to be flat. Free cash flow here also is impressive, tallying $2.5 billion in each of the past three years. LOW pays a 2% yield and carries $9 billion in debt (to Home Depot’s $10.7 billion), which is very manageable given the free cash flow. It also trades at 20 times estimates.

Finally, when a storm like this hits, I think booze. Somebody will be drowning their sorrows because they don’t have insurance and thus can’t afford to fix things up using a home improvement company. Here I like Beam (NYSE:BEAM[5]), not just for its whiskey, but because it’s still growing at 12% long-term and has ample free cash flow.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  2. ALL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALL
  3. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  4. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  5. BEAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=BEAM

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