Investors betting on a multibillion-dollar construction rally in the western Florida hurricane zone have been putting a large number of chips on building materials, landowners, truckers, makers of mobile homes and banks. With Hurricane Charley damage estimates ranging from $8 billion to $20 billion, it is a theme that will not blow away quickly. 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 proving to be in short supply as insurance checks are cut and money begins to flow. Why bother thinking about the Florida rebuilding effort? It's because every now and then, investors need to take a breath and ask themselves, "What's obvious?" The investment racket is tough most of the time because we 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 western Florida and ask what's going on outside the window. The answer appears to be a fast whir of activity, 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 residents of southern Florida to move north, out of the path of the next big storm.
Huge Damage, Huge DemandThe hurricane damaged almost half the homes in Charlotte County, a coastal community on the Gulf Coast. About 25% of them, or 17,000, were destroyed or had very serious damage. Whole neighborhoods were wiped out.
In neighboring Lee County, officials said 250,000 buildings were damaged. Wal-Mart ( WMT) 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, you could drive around the state and make a lot of guesses about what would work. Or you could fire up the
MSN Money Stock Screener , ask it for a list of all the companies based in Florida, and focus on the ones that are the highest ranked in the MSN StockScouter rating system and have already earned the affection of early buyers. We'll go with the latter option for now and rely on readers to supply accounts to make up for the lack of an eyewitness visit. If you have an opinion, email me and put COMMENT in the subject line. To search for stocks in a single state in StockScouter, make the first criterion "Company Basics/State," the operator "=" and the value "FL," or Florida. If you click "Run Search" now, you'll see all 250 stocks in the database that have headquarters in that state. Because we're looking for relatively large, tradeable companies regarded highly 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. Next you'll 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 of 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 PortfolioMy list looks like this:
|Florida Rebuilding Portfolio |
These companies are poised to clean up.
|Company||Aug. 24 Close||Market Cap||StockScouter Rating||Industry||ROE||P/E|
|BankAtlantic Bancorp(BBX:NYSE)||$18.20||$1.1 billion||10||Savings & loans||16.1||16.1|
|Florida Rock Industries(FRK:NYSE)||46.2||$2.0 billion||10||Cement||17.6||17.7|
|Hughes Supply(HUG:NYSE)||61.7||$1.8 billion||10||Building materials||7.3||21.5|
|Florida East Coast(FLA:NYSE)||38.55||$1.5 billion||10||Railroads||7.5||32.6|
|The St. Joe Co.(JOE:NYSE)||47||$3.6 billion||9||Real estate development||17.9||40.7|
|Technical Olympic USA(TOUS:Nasdaq)||25.19||$1.1 billion||9||Residential construction||15.1||13.3|
|Ryder System(R:NYSE)||43.34||$2.8 billion||9||Rental & leasing services||12.8||15.9|
|Equity One(EQY:NYSE)||19.4||$1.3 billion||9||REIT - residential||8.7||18|
|Brown & Brown(BRO:NYSE)||44.36||$3.1 billion||9||Insurance brokers||21.3||25.2|
|Bluegreen(BXG:NYSE)||11.84||$304 million||9||Real estate development||15.9||10.6|
|Harbor Florida Bancshares(HARB:Nasdaq)||30.5||$730 million||8||Savings & loans||14.5||18.2|
|Landstar System(LSTR:Nasdaq)||51.54||$1.6 billion||8||Trucking||32.2||31.1|
|Rayonier(RYN:NYSE)||46.4||$2.3 billion||8||Property management||16.5||18|
|Lennar(LEN:NYSE)||45.47||$7.5 billion||8||Residential construction||23.7||9|
|Fidelity National Financial(FNF:NYSE)||36.49||$6.4 billion||8||Surety & title insurance||20.4||7.2|
|Fidelity Bankshares(FFFL:Nasdaq)||35.78||$541 million||8||Regional - Mid-Atlantic banks||10.2||28|
|WCI Communities(WCI:NYSE)||23.68||$1.1 billion||7||Residential construction||13.6||9.8|
|Dycom Industries(DY:NYSE)||25.63||$1.3 billion||7||Heavy construction||10.6||22.9|
|Ocwen Financial(OCN:NYSE)||8.7||$554 million||7||Savings & loans||7.4||23.5|
|Source: Jon Markman|
It's nice to see that most of the companies on the list are relatively small. Larger companies may be so diversified with national or international business that even a lot of south Florida rebuilding business won't affect earnings much. As an example, a Goldman Sachs report suggested that Home Depot ( HD) and Lowe's ( LOW) -- 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%. Lowe's, 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 StandoutsAll of the names on the list have potential, but one that merits special attention is Florida Rock ( FRK). Unless you're a contractor or in the middle of a building project, you probably didn't 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 raised its guidance for the rest of the year, and analysts all remarked that an increase in its price-to-earnings ratio 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-month to 18-month target around $60. Other interesting local companies in the construction supply business are Hughes Supply ( HUG) and timberland owner and forest-products supplier Rayonier ( RYN). Both are relatively cheap, well-run and worth owning distinct from Florida's woes. Trucking-logistics company Landstar ( LSTR) 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) and St. Joe ( JOE) and thrift BankAtlantic ( BBX) appear prepared to benefit from the storm-related increase in demand for homes and mortgages. I'll 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.