Harvey, Irma and Trump – Strong Tailwinds For Infrastructure Stocks
A little more than 10 days after Hurricane Harvey hit Houston, we are still getting estimates as to the extent of the damage that has been done. We not only discussed the extent of the devastation caused by Hurricane Harvey on last week’s Cocktail Investing podcast, we also put it into proper context given its size and scope, plus the fact that it hit the fourth largest city in the U.S. Now we’re putting some greater thought into what it could mean for investors.
Initial estimates put the damage from Hurrican Harvey 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. A more encompassing estimate from Enki Research, a group that calculates risks and costs of hurricanes, tsunamis, and other natural disasters, pegs the “middle-of-the-road” estimate for Harvey costs at anywhere from $48 to $75 billion. Over the coming days and weeks, we will get a far firmer picture as to how much it will cost Houston and its surrounding areas to recover from this tragedy.
As uncomfortable as it might be, we must view this storm as investors
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 Research, 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 third quarter 2017 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 clears, however, we’ll see rebuilding efforts spring forth. When we look at the situation through our thematic investment lens, the most obvious choice would be 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 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. Other retail and distributor candidates to benefit from the eventual rebuilding effort include Builder’s FirstSource (BLDR) and BMC Stock Holdings (BMCH).
As we like to say at Tematica Research, one of our investment strategies is always to “buy the bullets, not the guns.” In this case, companies like Home Depot and Lowes are the “rebuilding guns”. What we have done is dig into the category and identify the “rebuilding bullets.” What we’re talking about are things such as wallboard, paint and other coatings, carpeting, as well as fixtures and related hardware. In keeping with that other prospects that could benefit from the rebuilding of homes, office space and infrastructure include:
- Lumber and Wood: Lumber Liquidators (LL), Weyerhaeuser (WY), and Universal Forest Products (UFPI).
- Cement, Concrete, and Aggregate Suppliers: US Concrete (USCR), Eagle Materials (EXP), Lafarge SA (LFRGY) and Vulcan Materials (VMC)
- Wallboard Manufacturers and Construction Materials: USG Corp. (USG), Continental Building Products (CBPX), Armstrong World Industries (AWI), and Summit Materials (SUM)
- Paint and Coatings: Sherwin Williams (SHW), and PPG Industries (PPG)
- Plumbing, Cabinetry, Door and Flooring Products – Masco Corp. (MAS), Fortune Brands Home & Security (FBHS), American Woodmark (AMWD), Masonite International (DOOR), and Mohawk Industries (MHK).
These Investment Tailwinds Extends Beyond Just Rebuilding Houston
Potentially adding to the pain inflicted by Hurrican Harvey is the latest storm, Hurricane Irma, which as we write this has been upgraded to a category 5 as she continues to strengthen. Based on current models, Irma looks to slam into northeastern Caribbean islands and Puerto Rico by Wednesday, September 6 before possibly taking aim at the US mainland. Already states of emergency have been called in Puerto Rico and Florida. We’ll continue to monitor the situation to gauge the degree of destruction to be had from Irma, and what it means in terms of incremental rebuilding following Harvey.
The combination of these two storms is likely to rekindle the larger need to rebuild domestic infrastructure, a key tenant of Candidate Trumps 2016 election platform. To date, President Trump has been focused on healthcare reform and is on the cusp of potential tax reform. These two Hurricanes, however, bring the need to address the country’s crumbling infrastructure back into the limelight. Candidly, domestic infrastructure has been a mess even before these two storms, receiving a grade of D or D+ from the American Society of Civil Engineers for the last 19 years. Over the last two decades, with the exception of Rail, every category has received a failing grade. This implies two things:
- There has been little progress in rebuilding domestic infrastructure.
- The incremental cost to properly update bridges, tunnels, roads, dams, schools, ports, and waterways has continued to move higher.
The latest figures from the American Society of Civil Engineers estimate $4.6 trillion is needed to adequately address the U.S.’s infrastructure needs over the 2016-2025 period. The good news is $2.5 trillion has been corralled in estimated funding, but that still leaves a $2.1 trillion funding gap. President Trump has issued an executive order aimed at speeding up approvals for infrastructure projects. The order aims to shrink the environmental permitting process to as little as two years, down from an average of seven years for “complex” highway projects, and ensure that just one federal agency serves as the point of contact for each project’s paperwork. While that is a positive first step, there are much more that must follow in order to put meat on those infrastructure rebuilding bones.
We will continue to monitor developments aimed at progressing his $1 trillion initiative that aims to address the nation’s roads, tunnels, and bridges. For now, we’ll place each these and other candidates on our Thematic Watch List. In the coming weeks and months, as the rebuilding process in Texas and Louisiana begins, we will also be assessing each of these stocks through our thematic lens. As more comes to light on the eventual rebuilding of Houston and surrounding areas as well as Irma related damage and rebuilding aging domestic infrastructure, we’ll share with Tematica Investing subscribers, which candidates make the cut and make it to the Tematica Select List.
