Katrina's Winners and Losers

Natural disasters can be catastrophic. Hurricane Katrina struck with a vengeance last summer. Lives were lost. Homes were lost. Even if you were far removed from the deadly storm, you no doubt have haunting images burned into your memory.

I lived through Katrina, but I was one of the lucky ones. I was in South Florida as the storm blew through. I lost a few trees. I lost power for a few days. However, it wasn't until the storm left Florida and began strengthening as it danced in the Gulf of Mexico that the storm's true devastating force rose up to earn its infamy. Like I said, I was one of the lucky ones.

Wall Street didn't miss a beat in all of this. In the real world, there were few winners and way too many losers, but the investing realm provides opportunities on the long and short side whenever calamity strikes.

Assessing the storm
In the days following Katrina, we covered some of the affected sectors. The insurance companies took a huge hit, naturally. Airlines were grounded on flight cancellations in the affected areas. Given the outages and costly repairs, local utilities also lost power.

The unique nature of the coastal gambling towns that were hit off the Gulf Coast also led to a dramatic impact on the casino industry. Deep-sea oil exploration felt the hit, too.

The market reactions are instinctive at first. It's the nature of the market as a popularity-polling device. In fact, as bleak as the scene was in Louisiana and Mississippi, the S&P 500 squeezed out a small gain the day that the storm made an early morning landfall.

A year later, we have the ability to look back and see how one-day swings can either overestimate or underestimate the eventual reality and gravity of the impacted companies. Let's start by taking it all closer to home.

The home improvement mirage
Like clockwork, shares of Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) inched 2% higher on Aug. 29, 2005. That argument for the hardware stores is simple. A lot of the rebuilding effort will go through their registers. You also often see the "do it yourself" chains inch higher as windstorms approach, as they count on customers lining up to buy everything from plywood to batteries so they can weather the storm.

No one will deny that some of the tens of billions in casualty losses in our country's costliest natural disaster went to contractors and homebuilders that occasionally frequent the orange aprons. The problem is that Home Depot and Lowe's each were ultimately saddled with tempered growth expectations caused by larger macroeconomic factors.

8/29/05

8/25/06

Change

Lowe's

32.30

26.75

(17%)

Home Depot

40.54

33.48

(17%)



The best insurance
Insurance can be sweet business when the actuary tables line up just right. Just check out Warren Buffett's billions for proof of that. However, companies are sometimes caught on the losing end of the probability curve.

The day after Katrina hit, Bill Mann took a look at a pair of Motley FoolHidden Gems recommendations. Reinsurer Montpelier Re (NYSE: MRH  ) and property insurer United Fire and Casualty (Nasdaq: UFCS  ) had exposure in the affected area.

The market shrugged it off at first. They weren't the insurers bearing the brunt of the claims. Both companies even ended their first trading day higher after Katrina struck. Since then, it hasn't been all that rosy.

8/29/05

8/25/06

Change

Montpelier Re

33.11

17.46

(47%)

United Fire and Casualty

40.08

28.32

(29%)


Even after surveying the damage, the bad news got worse. Montpelier had initially pegged its exposure to be in the range of $450 million to $675 million but wound up being on the hook for $916 million. The longer-term harm to the industry was real. The tropical-storm alphabet kept going, as Hurricane Rita followed Katrina.

This shouldn't scare an investor away from the insurance space. After all, probability tables get tweaked, and if insurers find themselves paying out more than they are taking in, customers will get hit with the higher premiums. That's what David Gardner was thinking when he took advantage of a banged-up Montpelier price to recommend the investment to his Stock Advisor subscribers earlier this year.

Up from the ground came some bubbling crude
Eight major refining operations were shut down in the Gulf Coast as a result of Katrina. In sum, we were talking about the capacity to refine 2 million barrels a day that was temporarily put out of commission. Two of those refineries belonged to Valero (NYSE: VLO  ) and Marathon (NYSE: MRO  ) . Would their stocks get slammed? Not at all. They inched higher after the storm struck as promises of higher oil prices would make their services all the more valuable.

8/29/05

8/25/06

Change

Valero

45.94

62.40

36%

Marathon Oil

58.88

92.13

56%



Of course, we can't just hand the energy sector a blue ribbon. It may be one of the few affected sectors to thrive since Katrina, but clearly there have been several other factors keeping the oil-producing industry buoyant.

Beyond stock charts and storm charts
Trivializing disasters and breaking them down into bite-sized market-influencing basics may seem cold. I get that. However, allow me to come off as potentially even colder by pointing out that it is also a tribute to the persistence of the financial markets. We mourned as a country for losses in the wake of Katrina, yet a little more than two hours after the storm made landfall in Louisiana, the opening bell rang as scheduled at the New York Stock Exchange.

Katrina was a tragic event. It also cost corporations more than just the uncertainty associated with wild trading fluctuations. Several establishments -- including a flooded amusement park -- may never open again. You even have a company like Ruth's Chris (Nasdaq: RUTH  ) , the upscale steakhouse operator, that had little choice but to abandon its submerged three-story office in the New Orleans suburb of Metairie and relocate for keeps in Orlando, Fla.

Yes, companies, emotions, and share prices are always on the move after major events reshape perspectives. They define us. With the proper nudge and mettle, they may even grow to enrich us. Ernesto, please be kind.

Home Depot is anInside Valuerecommendation. Montpelier Re is a Hidden Gems andStock Advisorselection. United Fire and Casualty is a Hidden Gems pick, and Valero is a former Hidden Gems selection. Check out our suite of newsletters by with a 30-day free trial.

For more Foolish Katrina coverage:

Longtime Fool contributor Rick Munarriz has lived through a few hurricanes, including Hurricane Andrew in 1992. After Katrina, Hurricane Wilma struck two months later and rendered his home powerless for 10 days. He doesn't own any of the stocks in this article. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Fool has a disclosure policy.


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11/20/2014 4:03 PM
HD $97.57 Up +0.87 +0.90%
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UFCS $28.44 Up +0.45 +1.61%
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VLO $50.26 Up +0.14 +0.28%
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