September 06, 2005
Tuesday

Investors reacted to Hurricane Katrina in typical post-disaster fashion: Buy first, ask questions later.

Last week, investors piled into sectors that could benefit from the tragedy, including oil refining and marketing, oil field services, manufactured housing, construction/engineering services and building products.

I say sectors, because it seemed that investors were buying industries, not companies.

Take the case of Building Materials Holding Corp., which soared 21.6 percent last week.

Based in San Francisco, BMHC is a large distributor of building materials to contractors in the West, but it has no distribution east of Texas, says Ellis Goebel, senior vice president for business development and investor relations.

It also provides framing and other construction services to big home builders, but it does no work in Louisiana. "The closest we are is Florida," says Goebel.

The company does not expect additional business as a result of Katrina. "We're not there," Goebel says.

BMHC conceivably could benefit if hurricane damage keeps energy prices high. That might force the Federal Reserve to stop raising short-term interest rates sooner than expected. If long-term rates stay low as a result, the housing boom could continue, assuming gasoline prices don't go high enough to cause a recession.

Home-building stocks were up 3 percent to 4 percent last week on that scenario. That could explain some, but not most, of BMHC's rise.

"I think some investors are inappropriately thinking about them as a hurricane play," says Jim Wilson, research director with JMP Securities.

BMHC's counterpart in the East, Builders FirstSource of Dallas, may benefit from the rebuilding effort. Its shares were up 20.6 percent last week.

Another head-scratcher was Florida Rock Industries, which makes ready-mixed concrete, sand and crushed stone. It rose almost 15 percent last week, but some analysts wondered why, considering how expensive it is to ship such heavy products.

"Substantially all operations are conducted in Florida, Virginia, Georgia, Maryland, Washington, D.C., Tennessee, Alabama, North Carolina and Delaware," the company's Web site says.

"Some companies will definitely get some sales down there. The question is, how significant and over what time period," says Sam Lieber, president of the Alpine Funds.

The companies that stand to gain the most are those that already operate in the area. But these companies are also likely to have sustained damage, which is why it's crucial for investors to do their homework.

Lieber says hotels may be the first to benefit if evacuees are forced to extend their stays. But you have to know your chains, because some operate their own hotels and some are franchised.

Lieber says Hilton could see increased occupancy in its New Orleans-area hotels, which include moderately priced chains such as Hampton Inn and Embassy Suites. They sustained little damage and are housing the National Guard, he says.

Over the medium term, apartment occupancy rates might increase as hurricane refugees seek more permanent housing. However, this move will have minimum bottom-line impact for large apartment real estate investment trusts.

Lieber says the only publicly held apartment-and-mall REIT in the New Orleans area is Sizeler Property Investors. Its stock fell 12 percent last week. The company says it has not been able to assess damage to its properties.

Companies that make manufactured housing could benefit as the Federal Emergency Management Agency begins to provide temporary shelter. In past disasters, FEMA has provided both campers and mobile homes.

The mobile-home industry has been suffering from an inventory glut, including mobile homes that were repossessed after a period of easy financing.

"This will help clean some of that up," says Lieber.

Shares in Cavalier Homes and Southern Energy Homes - both based in Addison, Ala., and closest to the scene - rose 40 percent or more last week.

Other players include Fleetwood Enterprises and Champion Enterprises, both up around 18 percent, and Coachmen Industries, up 8 percent.

Palm Harbor Homes, which makes higher-end manufactured housing, was up about 7 percent.

Thor Industries, which makes recreational travel trailers, including Airstreams, rose 3 percent.

While Thor could get FEMA orders for its RVs, it could also be hurt by higher gasoline prices.

The same is true for Fleetwood and Coachmen, which make RVs as well as modular homes. For Fleetwood, "net-net, it might not be a benefit," says Lieber.

Longer term, the housing picture gets muddy. A large number of homes in the area did not have flood insurance. It's too soon to say when, how, or if these homes will be rebuilt.

To the extent that they are, the large homebuilders are not likely to be major players because they generally work on big open tracts of land they own.

The other big gainers last week were energy-related stocks, but they, too, are a mixed bag.

"We will certainly see higher prices for these products this year and next," says Charles Ober, manager of the T. Rowe Price New Era fund.

In the short run, drivers will be topping off their tanks and exacerbating any shortages caused by Katrina.

Longer term, prices could moderate if demand falls off and if foreign countries fulfill their pledges to send extra crude and crude products to the United States.

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