One of the silliest, yet most common, stories given investors in the wake of a natural disaster is to buy Home Depot Inc (NYSE:HD) stock.
But my advice is that you don’t do that. Instead, follow the money. Money is the balm that heals disasters, disasters raise the value of money, and those who have it after disasters profit.
That means insurance stocks, which could become bargains as they pay out on claims, look interesting. This is especially true for property insurers — especially big ones that spread their risk around wisely. They may take a hit that lets you get a bargain, and some are priced attractively right now.
You also might look to bank stocks, especially banks covering the affected region, which should do well due to increased loan demand. Banks sell money, and rising demand for money is good news for banks.
Best of all, you can pick up some of these stocks at bargain rates right now and, even if they don’t get a pop from the storm, you have a pretty good investment.
What stocks am I talking about?
Look to Insurance Stocks
Property and casualty insurers like Berkshire Hathaway Inc. (NYSE:BRK.B), Markel Corporation (NYSE:MKL) — or better still, Marsh & McLennan Companies, Inc. (NYSE:MMC) — should be the first place to look.
Insurers often get battered in the wake of a natural disaster because they’re going to have to pay out on claims. But investors forget that big payouts also mean the possibility of rate increases on the next round of policies.
The segment has been battered lately by a flood of capital. Investors hunting for yield have joined insurance pools that have kept rates down, even on the largest policies. You put up your capital, someone writes the policy and, if nothing happens, you get the premium. If something does happen, you lose your capital, but careful spreading of bets means you should not lose it all. This is how gambling becomes a conservative investment.
Marsh & McLennan stock is up almost 20% this year, it has an affordable dividend of 34 cents per share for a yield of 2.1% easily covered by earnings, and even now the price-to-earnings multiple of 21 isn’t terrible. Chart-watchers love its price formation. Analysts are mildly bullish, with almost half saying buy and the rest hold.
MMC is a good stock to invest in, even without a hurricane.
Try Regional Banks
Another good place to play are regional bank stocks covering the impacted area. These companies are going to see strong loan demand in coming months as people move to rebuild.
SunTrust stock has been on a tear since February, going from a low of under $32 per share to its current price over $45. Even at that price, STI sports a low P/E of 12.4, and the 26-cent-per-share dividend, easily covered by earnings, yields 2.3%. Analysts have been warming to it lately.
BB&T Corporation (NYSE:BBT), which is based in North Carolina but operates throughout the Southeast, has similar characteristics to SunTrust. Its stock, too, bottomed in February, but is since up 23%. It’s more volatile than STI, so as late as June, you could have bought BBT shares at about $33 apiece. Even at its present price of almost $39 per share, you get a yield of about 3.1%, and the P/E of 15 is very affordable.
Home Depot Still Is Good, But …
Don’t get me wrong. I like Home Depot. I own Home Depot stock. HD has made a lot of money for me.
But you don’t buy a stock like Home Depot for hurricane season. People who did that Oct. 6 were late to the party. They paid a P/E of 22 for a stock that’s down for the years. They paid $130 for something they could have gotten for $112 in February.
Even for those investors who have bought the stock recently, however, patience will be rewarded. Home Depot sales are growing a steady $5 billion per year. Margins have been rising too, albeit slowly. You’re even getting an affordable 69-cent quarterly dividend that at least yields better than a 10-year T-note.
The broader lesson? Don’t rush in to buy anything when disaster strikes. Look carefully, and follow the money.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at email@example.com or follow him on Twitter at @danablankenhorn.