I want to begin by saying that my heart goes out to all those affected by Hurricane Harvey. It’s almost impossible for me to even imagine the amount of rain that has fallen, and I know this is a trying time for hundreds of thousands of people. I am moved by the heroic efforts of so many to help, and I am confident that Texas and Louisiana will rebuild and come out stronger than ever.
As everyone looks ahead to the rebuilding and recovery from the horrible devastation caused by this storm, there will be some impact in the market and on stocks. I wanted to share some thoughts on a couple of sectors that will be impacted the most: insurers and energy stocks.
First, the recent market action is not necessarily a discount buying window for insurance stocks like American International Group Inc (NYSE:AIG), Prudential Financial Inc (NYSE:PRU) and Allstate Corp (NYSE:ALL). I also recommend steering clear of the reinsurance companies that pool risk for the front-line carriers and will ultimately pick up the bill for the industry’s pain. Everest Re Group Ltd (NYSE:RE) and Reinsurance Group of America Inc (NYSE:RGA) aren’t going to bounce back from this one fast.
The Impact on Energy Stocks
I’m not looking for the hurricane to have a huge impact on underlying energy prices. Even if the Gulf goes completely offline, the Dakotas are more than capable of picking up the slack. If you want a relatively pure play on Dakota shale, Hess Corp. (NYSE:HES) just trimmed its exposure to Texas back in June.
But Houston is still the center of the world when that oil moves downstream. Every day refineries take gallons of gas and other petroleum products out of the consumption chain. That’s an immediate windfall for companies that can turn that shortfall into pricing power, passing it on to customers who need to keep the tanks off empty. Names like Phillips 66 (NYSE:PSX) and Marathon Petroleum Corp (NYSE:MPC) could make for good investments here.
Gas prices may not be spiking yet, but it doesn’t take a lot of 3% bumps at the pump to feed into consumer inflation. Remember, transportation is a hidden tax on just about everything we buy — from Amazon.com, Inc. (NASDAQ:AMZN) packages in their trucks to the old-fashioned weekend trip to the mall — and modern agriculture burns a lot of oil in itself. If the Federal Reserve was looking for an inflation trigger, this could be it. Construction materials companies and the contractors themselves are also going to get to put excess capacity to work once the region rebuilds, pulling some slack out of commodity pricing and labor costs.
Look at Freeport–McMoRan Inc (NYSE:FCX): we’re going to need a lot of domestic copper to replace wrecked housing stock. We’re also going to need domestic steel — United States Steel Corporation (NYSE:X) — and concrete from companies like Martin Marietta Materials, Inc. (NYSE:MLM) and Vulcan Materials Company (NYSE:VMC). This isn’t the $1 trillion infrastructure package Wall Street wanted, but it’s probably enough to cycle an extra $40 billion or so through the commodity players on up.
I hope this gives you a little direction during these trying times. While you can’t control the weather, you can manage your exposure to it.