Several days after Hurricane Harvey initially hit Houston, the storm continues to dump massive amounts of rain on Texas and Louisiana.  As the waters are just now beginning to recede, we are still getting estimates as to the extent of the damage that has been done. With rain slated to continue until tomorrow, those estimates look like a moving target in the upward direction.

Initial estimates are putting the damage from the storm into the billions of dollars — Hannover Re, one of the largest re-insurers in the world, predicted a price tag of $3 billion on insured losses. That’s just what’s insured, and a more encompassing estimate from Enki Research, a group that calculates risks and costs of hurricanes, tsunamis, and other natural disasters, says the “middle-of-the-road” estimate for Harvey costs at anywhere from $48 to $75 billion. Over the coming days, I suspect we will get a far firmer picture as to how much it will cost Houston and its surrounding areas to recover from this tragedy.

One of the wisest words I’ve heard in the investing world is to be “cold-blooded” when it comes to one’s investments – don’t fall in love with your holdings, and in times of uncertainty or tragedy remain focused. In the case of the Hurricane Harvey disaster, the people of Houston are in all of our thoughts here at Tematica, but we also realize the rebuilding effort to come over the ensuing months will be massive. Near-term, we’re likely to see a hit to the overall economy, much the way we did after Hurricane Katrina hit New Orleans. Accuweather projected it to have a $190 billion impact on the economy, which means we are likely to see a downtick in the economy in September and into October. If Accuweather’s eye-popping estimate is correct, Harvey would cost nearly as much to the economy as Hurricanes Katrina and Superstorm Sandy combined. In other words, expect those GDP forecasts to be revised lower, and we could see the Fed hold off embarking on unwinding its balance sheet a tad longer.

Before too long and as the water recedes, however, we’ll see rebuilding efforts spring forth and that has us eyeing Home Depot (HD), which has numerous stores located in and around the Houston area. We’re also looking at HD Supply (HDS), the sister company that focuses on more so on contractors, government entities, maintenance professionals, home builders and industrial businesses than Home Depot. We could look at shares of Lowe’s Companies (LOW) as well, but Home Depot has been handily beating it delivering faster top and bottom line growth, and Lowe’s lacks the “professional” exposure found at Home Depot Supply.

One of our favorite investment strategies is to “buy the bullets, not the guns,” but in this case, we see Home Depot as a central repository for the things contractors and individuals will need to rebuild – lumber, wallboard, paint, hardware and so on. In assessing the potential for call options between Home Depot and HD Supply, the ones for HD Supply are simply too thinly traded to make them viable. That leaves us to focus on Home Depot calls, and in looking to capture the wave of rebuilding that will begin to occur in the coming months it means a strike date in early 2018.

Putting all of these pieces together ahead of what is likely to be upward revenue and EPS revisions for Home Depot in the coming days and weeks, we’re adding the Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000) that closed last night at 4.32 to the Tematica Options+ Select List. In keeping with our view that September could be a volatile month – check recent Monday Morning Kickoff and Tematica Investing issues for more on this – we will set a 2.00 stop loss, with the intent of moving that protection up as Home Depot’s business benefits from the Harvey disaster.

In Summary:

• We are issuing a Buy on the Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000) that closed last night at 4.32 to the Tematica Options+ Select List.
• We would be buyers up to 5.00, and we are setting a stop loss at 2.00, which we intend to move up as the calls appreciate in the coming weeks.

Waiting for August Sales Data

Tomorrow we enter September, and that means the usual start of the month data. Among that flow, we’ll get the August Car & Truck sales data and given our short position in General Motors (GM) shares we’ll be dissecting that when it hits. We expect the recent trend of slower than expected sales and rising incentives to continue, but in keeping with our comments on Harvey above, in the coming months, we could see a wave of car and truck replacement activity. I’ll continue to keep close tabs on this short position, looking to cover at the proper time.

• We are holding steady with our short position in General Motors (GM) shares and our price target remains $30. Our buy-stop level remains at $40.

Next week we should get the August sales data for Costco Wholesale (COST), and given our October calls positions we will also be paying close attention to the results. Candidly speaking, we here at Tematica are rather frustrated with this position as I suspect you are. Even after delivering stellar July same-store sales results and continuing to open additional locations, a key driver of membership fee income, COST shares have been unchanged over the last month and that has weighed on the calls. The culprit is the market’s view of Amazon (AMZN) acquiring Whole Foods Market (WFM), but the mistake it is making is equating Costco’s business to that of Kroger (KR) and other grocers.

As frustrating as this misconception is to watch, we’ll continue to hold the Costco calls for now. Should they get some lift on the company’s next sales report, we’ll look to limit our losses, but if we are languishing at current levels a more prudent move might be to let the calls expire. More on this after the next report from Costco.

• Ahead of the August sales report from Costco Wholesale, we are keeping COST October 2017 $173 calls (COST171020C00173000) calls in play.