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The rebuilding-Florida portfolio
The massive recovery effort in the wake of two powerful storms provides a simple investment idea. The companies that do the work should show serious profits.
By Jon D. Markman
The investment racket is tough most of the time because we very often make it more difficult than it needs to be. We try to forecast the demand for wireless phones in Western Europe when maybe all we need to do is call a friend in Florida and ask them to describe whats going on outside their window.
Even before Hurricane Frances barreled into Florida over Labor Day weekend, the bills for Hurricane Charley totaled at least $8 billion. Two powerful storms have struck only weeks apart, mauling opposite coasts of a vulnerable, thickly populated state.
Why bother thinking about the Florida rebuilding effort? Its because every now and then, investors need to take a breath and ask themselves, Whats obvious?
The answer appears to be a fast whir of activity that starts as soon as the winds die down, with waste companies bulldozing and picking up hurricane debris; municipalities condemning hundreds of damaged properties in an effort to take advantage of the situation by remodeling their cityscapes; mobile homes arriving by the hundreds to house the homeless; and land-development companies subtly encouraging southern Florida residents to move north out of the path of the next big storm.
Where to put your chips in this multibillion-dollar construction rally? Building materials, landowners, truckers, mobile-home makers and banks would be a good start.
Rock-mining stocks seem to be among the most compelling, as the disaster comes at a time of a global shortage of cement, the most basic of construction materials. But several other commodities, including lumber and steel, are already proving to be in short supply as insurance checks are cut and money begins to flow.
Huge damage, huge demand
Hurricane Charley, for example, damaged almost half the homes in Charlotte County, a coastal community on the Gulf Coast. About 25%, or 17,000, were destroyed or had very serious damage. Whole neighborhoods were wiped out. In next-door Lee County, officials said 250,000 buildings were damaged. Wal-Mart Stores (WMT, news, msgs) said on Monday that the hurricane had forced it to close 75 shores between Fort Myers and Daytona Beach on Aug. 13, trimming sales for the month. But on the other hand, the retailer reported brisk business in resupplying homeowners who lost clothes, electronics and much more to the winds.
To determine the best potential trades in this environment, one could drive around the state and make a lot of guesses about what would work. Or one could fire up the MSN Money Stock Screener, ask it for a list of all the companies based in Florida, and then focus on the ones that are the highest ranked in the MSN StockScouter rating system and have already earned the affection of early buyers.
Well go with the latter option for now, and rely on readers to supply ground-zero accounts to make up for the lack of an eyewitness visit. (If you have an opinion, e-mail Supermodels at jon.markman@gmail.com; put COMMENT in the subject line.)
To search for stocks in a single state in StockScouter, make the first criteria Company Basics/State, the operator = and the Value FL, or Florida. If you click Run Search now, youll see all 250 stocks in the database that have headquarters in that state. Since were looking for relatively large, tradable companies well-regarded by Scouter, next set the Screener to search only for stocks with market capitalizations greater than $100 million, prices greater than $3, average daily volume greater than 25,000 shares per day and StockScouter ratings greater than 7. Also set the Screener to display only the companies industry, price ratios and recent performance returns. To shortcut to my screen, click here.
Next, youll need to click File/Export/Export to Excel to automatically output the choices to Excel for further study. Sort the results by Industry Name and delete all the companies that are unlikely to have anything to do with the rebuilding effort, such as biotechs, defense contractors and cruise-ship operators.
The rebuilding portfolio
Your list may vary, but mine looks like this:
| StockScouter's Florida rebuilding portfolio | | Company | 8/20 price | Mkt cap | SS rating | Industry | ROE | P/E | | BankAtlantic Bancorp (BBX, news, msgs) | $18.14 | $1.1 billion | 10 | Savings & loans | 16.1 | 16.1 | | Florida Rock Industries (FRK, news, msgs) | $45.85 | $1.9 billion | 10 | Cement | 17.6 | 17.7 | | Hughes Supply (HUG, news, msgs) | $62.70 | $1.9 billion | 10 | Building materials | 7.3 | 21.5 | | Florida East Coast (FLA, news, msgs) | $38.15 | $1.4 billion | 10 | Railroads | 7.5 | 32.6 | | The St. Joe Co. (JOE, news, msgs) | $46.42 | $3.5 billion | 9 | Real estate development | 17.9 | 40.7 | | Technical Olympic USA (TOUS, news, msgs) | $25.30 | $1.1 billion | 9 | Residential construction | 15.1 | 13.3 | | Ryder System (R, news, msgs) | $43.50 | $2.8 billion | 9 | Rental & leasing services | 12.8 | 15.9 | | Equity One (EQY, news, msgs) | $19.42 | $1.3 billion | 9 | REIT - residential | 8.7 | 18.0 | | Brown & Brown (BRO, news, msgs) | $43.93 | $3.0 billion | 9 | Insurance brokers | 21.3 | 25.2 | | Bluegreen (BXG, news, msgs) | $11.70 | $304 million | 9 | Real estate development | 15.9 | 10.6 | | Harbor Florida Bancshares (HARB, news, msgs) | $31.11 | $740 million | 8 | Savings & loans | 14.5 | 18.2 | | Landstar System (LSTR, news, msgs) | $52.79 | $1.5 billion | 8 | Trucking | 32.2 | 31.1 | | Rayonier (RYN, news, msgs) | $46.22 | $2.3 billion | 8 | Property management | 16.5 | 18.0 | | Lennar (LEN, news, msgs) | $45.10 | $5.5 billion | 8 | Residential construction | 23.7 | 9.0 | | Fidelity National Financial (FNF, news, msgs) | $36.63 | $6.3 billion | 8 | Surety & title insurance | 20.4 | 7.2 | | Fidelity Bankshares (FFFL, news, msgs) | $36.14 | $546 million | 8 | Regional - Mid-Atlantic banks | 10.2 | 28.0 | | WCI Communities (WCI, news, msgs) | $23.83 | $1.1 billion | 7 | Residential construction | 13.6 | 9.8 | | Dycom Industries (DY, news, msgs) | $25.14 | $1.2 billion | 7 | Heavy construction | 10.6 | 22.9 | | Ocwen Financial (OCN, news, msgs) | $8.68 | $549 million | 7 | Savings & loans | 7.4 | 23.5 |
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Its nice to see that most of the companies on the list are relatively small, since larger companies may be so diversified with national or international business that even a lot of south Florida rebuilding business wont affect earnings much. As an example, a Goldman Sachs report suggested that Home Depot (HD, news, msgs) and Lowes (LOW, news, msgs) -- national hardware-store chains based in Georgia and North Carolina -- would share a $900 million revenue boost from Hurricane Charley. But Goldman said that the chains typically sell goods at cost after natural disasters, reducing the impact on profits. The report said Home Depot, with annual sales greater than $69 billion, would see revenue grow just 0.8%, while Lowes, with revenue of $33.7 billion, would see revenue growth of 0.7% -- yielding just a 1-2% gain in earnings per share over the next 12 months.
Citing the standouts
All the names on the list have potential, but one that merits special attention is Florida Rock (FRK, news, msgs). Unless youre a contractor or in the middle of a building project, you probably didnt know there was a serious worldwide shortage of cement -- the powdered limestone mixture that mixes with rock, gravel and water to make concrete. The problem is China and its seemingly insatiable thirst for building materials as it scrambles to build its Olympic venues, not to mention factories, roads, dams and apartment houses. Florida Rock, one of the largest miners, producers and marketers of cement and rock aggregates in the mid-Atlantic region, has been caught in the middle -- happy to see higher demand and prices for its products but at the same time not able to supply enough of it and having projects delayed for months.
In its July earnings report, Florida Rock reported a 43% increase in earnings per share over the same quarter in 2003 on a 27% increase in sales to $251 million, with price increases of 5-9% for aggregates supplementing favorable weather and construction trends. The company lifted its guidance for the rest of the year, and analysts all remarked that an increase in its price/earnings multiple was deserved as well. With a clean balance sheet highlighted by low debt, it looks like a good candidate for continued strength as its home state and neighboring areas rebuild. The stock has moved up a lot in recent days, so wait for it to cool off a bit (perhaps to the $45 area), then set a 12- to 18-month target around $60.
Other interesting local companies in the construction supply business are Hughes Supply (HUG, news, msgs) and timberland owner and forest-products supplier Rayonier (RYN, news, msgs). Both are relatively cheap, well run and worth owning distinct from Floridas woes. Trucking logistics company Landstar (LSTR, news, msgs) has a national business, but its services are in higher demand as heavy construction products and store resupply needs will ramp up more business in the quarter than analysts or the company have modeled. Meanwhile, residential community developers Technical Olympic (TOUS, news, msgs) and St. Joe (JOE, news, msgs) and thrift BankAtlantic (BBX, news, msgs) appear prepared to benefit from the storm-related increase in demand for homes and mortgages.
Ill keep an eye on all of these hurricane-recovery stocks over the next six months and report back on whether the rebuilding effort turned out to be a windfall or a lot of hot air.
Fine Print
For another way to play the worlds cement shortage, consider Cemex (CX, news, msgs), the $9 billion cement goliath based in Mexico. The largest supplier of U.S. cement, its forward price multiple of 8.4 is likely to move up to match and surpass its expected growth in the 10-12% range. Lafarge (LAF, news, msgs) is the other major international cement player, and it is likewise likely to see business improve -- though it is not as undervalued as Cemex. For more on Cemex, visit its U.S. Web site. For more on Lafarge, click here. . . . Florida Rock is on my list of the handful of stocks that have advanced in nine of the past 10 calendar years. It advanced throughout the bear market; it faltered last, on a calendar-year basis, in 1994 (down 7%). Learn about it here. . . . St. Joe (JOE, news, msgs) is Floridas largest non-public landowner; learn more here. It is working with partners to develop the Panhandle under the marketing rubric of Floridas Great Northwest.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Markman had positions in Florida Rock, BankAtlantic and Landstar.
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