This company will make huge profits rebuilding Houston
From Justin Brill, Editor, Stansberry Digest:
Florida braces itself for Hurricane Irma…
While Texas recovers from the destruction left by Hurricane Harvey last week, Florida is preparing for its share of strong weather.
We’ve been keeping a close eye on the recent storms. And we’ll continue to monitor Hurricane Irma as she tears her way through the Caribbean and heads toward Florida at a Category 5 level. Florida has already declared a state of emergency, urging its residents to flee. Many expect record levels of devastation.
As this storm shakes up the Southeast, it’s also shaking things up in the markets. Investors are preparing for the worst and expect the storm to wipe out orange, sugar, and cotton crops.
Both hurricanes have also caused an uptick in lumber prices and home-improvement products from companies like Lowe’s (LOW) and Home Depot (HD), as people in Florida board up their homes and folks in Texas begin to assess their own property damage. Shares of both companies are up more than 4% over the last five trading sessions.
What Harvey means for Porter’s favorite sector…
Hurricane Harvey destroyed thousands of homes and businesses. The total damage is still unknown, but analysts from credit-ratings agency Moody’s believe it could end up between $45 billion and $65 billion. Weather-forecasting company AccuWeather estimates the storm will tally as much as $190 billion in damages, which would make it the costliest storm of all time, ahead of Hurricane Katrina’s nearly $120 billion in losses.
If Hurricane Irma lives up to its billing and hits Florida as hard as some forecasters believe, the devastation could be even greater.
Of course, that isn’t great news for insurance companies, which will have to foot some of the bill to cover the damage. Longtime Digest readers know that Porter has always been a big fan of property & casualty (P&C) insurance stocks. He has gone so far as to call them “the only investments I hope my kids ever make.”
And while the high-quality insurers he has recommended in his flagship Stansberry’s Investment Advisory have taken a small hit since Hurricane Harvey, storms like these don’t sway his outlook on the industry. He and his analysts explained why in the September issue…
These large numbers scare insurance investors. The five P&C stocks we hold in our portfolio are down an average of 2.4% this month, but almost all of that drop has come over the last week after Harvey began deluging Texas. As we’ll explain, we’re not worried.
When you hear these large loss estimates thrown around in the coming days and weeks, keep in mind that not all of these damages are covered by insurance.
Hurricane Katrina caused around $120 billion of losses in 2005, but less than half of that was insured, according to Bloomberg. Hurricane Sandy caused around $75 billion of damage and only around one-third of that was insured. That’s because standard homeowner’s policies don’t cover flood damage. Many homeowners learn this tragic fact too late. Only one in six homes have flood insurance in Texas, according to Bryan Wood, a meteorologist and analyst at insurance firm Assurant.
Of course, the insured losses from both hurricanes will be significant…
But high-quality insurance companies are built to withstand major catastrophes. Their business model is designed for it. More from the issue…
The bottom line is that the P&C insurers in our portfolio were built to withstand disasters like this. The stock market always panics and overreacts to big catastrophes. We wrote extensively about this subject in November 2012 after Hurricane Sandy battered the northeastern U.S.
Back then, just as today, insurance stocks fell immediately after the storm hit. As we told you then, this always happens following big, headline-grabbing storms. But these dips are temporary.
In that issue, we published two charts showing the stock market’s overreaction to hurricanes Andrew and Katrina (as measured by the S&P Insurance Index). The index dropped immediately following both hurricanes. But the drops were just temporary “blips” on the index’s steady, upward climb.
We predicted the same thing would happen with Sandy. We expected to see a temporary dip… but the upward momentum of the index wouldn’t be interrupted. As you can see, that’s exactly what happened:
That’s exactly what Porter and his team believe will happen again in the aftermath of hurricanes Harvey and Irma. They expect their hand-picked portfolio of P&C insurance stocks – which they consider the best in the industry – to fare far better than the rest of the sector. As he explained…
Remember, P&C insurers have been enjoying years of relatively low catastrophe losses… so their reserves are high. Tropical storm activity in the U.S. has been calm in recent years. Harvey was the first Category 3 or higher hurricane to hit the U.S. in 12 years.
Large losses from catastrophes like Harvey help shake out the industry. They expose the weakest insurers that don’t charge enough in premiums to cover their insured risks. The P&C industry has been in what’s known as a “soft” insurance market – where competition is high and premiums are low – since 2014. Large catastrophe losses help chase away the weaker competition and cause premiums to rise again. Over the long term, that will only help the insurance stocks in our portfolio.
Hurricane Irma is reportedly one of the strongest storms ever to be recorded in the Atlantic. But large insurers – like the ones in the Stansberry’s Investment Advisory portfolio – won’t bear the brunt of the cost of widespread property damage. The Wall Street Journal notes that large insurance firms have abandoned writing policies in Florida back in 2006.
Today, smaller insurance companies cover most of Florida. That makes the larger, more established companies like the ones in Porter’s portfolio less likely to suffer big losses.
Meanwhile, Harvey’s effects on the energy sector will also be short-lived…
In the August 31 Digest, we discussed Harvey’s impact on the energy sector. But our resident commodities expert Flavious Smith also recently weighed in on the subject. As he explained to his Commodity Supercycles subscribers in an update last Friday…
The biggest direct impact from Harvey is the removal of approximately 4 million barrels of gasoline-refining capacity off the market. That’s 20% of the total U.S. output. With nearly every major refinery from Texas to Louisiana either partially or completely off line, much of the focus has been on gasoline shortages and rising prices at the pump.
You’ve probably noticed the bounce in prices in your neighborhood. Gasoline prices surged about $0.21 per gallon in Texas, but the effects have rippled throughout the country. In North Carolina and Georgia, for example, gas prices are up $0.27 per gallon this week.
But as Flavious noted, gas is just one of the many products produced from barrels of crude oil…
Other essential products – “petrochemicals” – that come from crude oil range from fertilizers to food additives to plastics. Houston and the surrounding areas along the Gulf Coast house the largest petrochemical-manufacturing base on the planet.
In fact, Texas alone produces 75% of the nation’s ethylene. Most people probably don’t know what that is, but this flammable gas is a key building block in making plastic.
Processing plants turn ethylene into polyethylene… which is used in trash bags and food packaging. Ethylene is also used in everything from PVC pipes to chewing gum. Shortages of plastic and other petroleum-based products will likely show up in consumer products in the coming months. But I don’t believe it’ll cause any long-term damage.
Meanwhile, crude-oil demand and prices are falling. As we’ve noted, oil prices dropped more than 8% in August – the largest one-month loss in more than a year. Flavious told his subscribers what Harvey meant for oil-related firms…
Harvey also created widespread damage to infrastructure, including pipelines and export terminals. The resulting disruption has led to massive bottlenecks all the way up through Cushing, Oklahoma – one of the largest crude-oil storage areas in the world.
With widespread outages at refineries and export facilities along the Gulf of Mexico, the industry simply has no place to store the crude oil until the pipelines, plants, and terminals all come back on line. That could take weeks or months, rather than days.
Speaking of the pipeline companies, they’ll likely decline the most in the short term. That’s because these companies are paid based on the amount of oil and gas flowing through their pipes. Therefore, any downtime leads to lost revenue that can’t be recovered. Plus, oilfield-services companies can expect to feel a pinch due to the drop in drilling and completion activity in the Eagle Ford Shale in southern Texas.
The companies in the Commodity Supercycles portfolio haven’t felt too much of a sting from Hurricane Harvey. Despite the scope of the devastation, Flavious believes “this event will ultimately prove to be a short-term blip in the sector.” Of course, he still believes that oil prices will bottom before soaring to new highs.
One company is set to benefit directly from Hurricane Harvey…
Earlier, we noted that home-improvement companies were benefiting from the rebuilding efforts in Houston and its surrounding areas. But one company in Flavious’ portfolio has soared from anticipated demand. As he explained…
Companies that supply the needed equipment and services for reconstruction will see a boost in business.
We’re already seeing that play out with concrete maker U.S. Concrete (USCR). The company has a strong foothold in Texas… with more than a quarter of its annual revenue coming from the state. Cement will be needed in everything from fixing petrochemical plants and pipelines to rebuilding public roads and bridges.
In the past week, shares of U.S. Concrete are up nearly 15% and just hit a new record high on Wednesday. Overall, we’re up 22% with this position in about seven months.
Last night after market close, the September issue of Commodity Supercycles hit inboxes. In it, Flavious recommended an energy company with a rock-solid balance sheet, growth potential, and a leg up on its peers. He believes shares could rise 20% or more within the next two years. But he’s even more interested in its fat – and growing – yield.
You can learn about Flavious’ world-class research – and access this month’s brand-new recommendation – with a no-risk, zero-obligation trial subscription to Commodity Supercycles. Learn more here.