Hurricane Florence tore through the Carolinas this past weekend, leaving billions of dollars of damage in its wake. In this episode of Industry Focus: Financials, host Jason Moser and contributor Matt Frankel, CFP, discuss how listeners can prepare from both a personal finance and an investment perspective.

A full transcript follows the video.

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This video was recorded on Sept. 17, 2018.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, September 17th, and that means we're talking the wide world of Financials. I'm your host, Jason Moser, and on today's show, we'll talk about the timely topic of hurricanes, we'll tap into Twitter for a listener question, and we'll wrap it up with something we're calling One to Watch. This was something inspired by what we do over Motley Fool Money every week, where we give you a stock we've got on our radar, and we'll talk a little bit about it, for good reasons or bad.

Joining me today is certified financial planner Matt Frankel. Matt, I hope you are staying dry there in South Carolina.

Matt Frankel: I am. It's been an eventful week, to say the least. 

Moser: Yeah, I can imagine. Florence is certainly taking its toll on the Carolinas and beyond. And our thoughts are certainly with everyone in the affected regions as they deal with the aftermath and the recovery. A big part of this recovery is going to depend on the insures. We want to talk today about what we can do as homeowners to prepare for storms like this; perhaps, as investors, ways we can benefit from events like this; and things we want to keep our eyes on, as well, as investors. 

First and foremost, I want to take a step back here a little bit. Florence has certainly taken a toll on the Carolinas and beyond. Our thoughts are with everyone in the affected that regions as they deal with the aftermath, and recovery. Now, a big part of this recovery is going to depend on insurers. Matt, that's where I thought we would kick off our conversation today, because there's a few different ways to look at this. We can look at this from the perspective of homeowners, but we're also an investing show here, so we want to look at things through the investing angle, as well. 

Let's take a step back here, first and foremost, let's look at the bigger picture. You and I both have some experience weathering these types of storms. I went through Hugo in Charleston in 1989. I know you spent some time down in the Florida Keys. What are some of the things that homeowners can do to protect themselves from storms like these?

Frankel: Insurance, as you mentioned, is a really big one. A lot of homeowners don't realize, especially if they're not in an obvious flood zone, that floods are not covered by most homeowners' insurance policies. If, say, a creek in your backyard overflows and causes damage to your home, you might be on your own for those damages. So, in storms like this, especially if you're a little inland and aren't really thinking in terms of flooding, you may want to look into flood insurance anyway, because this is not covered by most major insurance plans. FEMA has [...] zones, and if you're in what's called a V or an A flood zone, you're pretty much required to purchase flood insurance if you have a mortgage on your home. If you're in any other flood zone, the probability of a flood is considered to be once in 500 years or less, so you're not required to purchase flood insurance. That doesn't make it a bad idea. And in fact, in many places that aren't considered flood prone, it's pretty cheap to do so. So, flood insurance is by far probably the best way homeowners can protect themselves. 

Don't skimp on contents coverage is my other big insurance tip here. A lot of people will purchase flood coverage on their house only, and only put $5,000 or $10,000 for contents coverage. Well, contents coverage is everything that's not a physical part of your house. [...] if there's any remote possibility that you could flood, if a storm could come inland and flood your home, flood insurance is a must-have. Be sure, when you purchase flood insurance, that you're getting adequate contents coverage, not just on your home itself. You might be surprised how much it would cost to replace all of your stuff.

Moser: Yeah, I think those are all really good points there. Most people today, they would think, "Well, I'm not in a flood zone. Therefore, I don't need flood insurance." But when you take a step back, and you recognize the fact that if the wind blows your roof off, and then you get an inch full of rain in your house, I mean, chances are, insurance companies are going to consider that flood damage, and even potentially wind damage. Wind damage isn't always covered on the policy, either. It is a good reminder, always, to go check back your policy. Make sure you understand the coverages that you have. Speak with your insurance agent about adding particular coverages if you don't have them. 

I know one of the things I experienced, I've worked at Travelers Insurance for a spell. It was interesting to me to see how many people didn't have comprehensive coverage on their car. Comprehensive is something that you're going to need in case of a storm like this. Your typical collision and liability aren't going to cover those damages if a tree falls on that car and renders it unusable. One thing I always make sure I check back is understanding the comprehensive coverage we have on our autos at our house. I think the flood insurance, as well, is something that's really worth noting. 

Now, I don't know about you, but when we went through Hugo in 1989, we ended up staying at our house. We were right there in the middle of it in Mount Pleasant. The storm came right through us. We walked outside during the eye, we went back inside. We weren't in the middle of a flood-prone area, but there were pine trees all around us. We caught a few trees on the house. And while we were there to help mitigate some of the damages that were there, I can't help but feel like maybe we would have been better off taking off and leaving town. But this was 1989, so information didn't travel quite as quickly as it does today. 

But Matt, we see a lot of these counties, these states, that throw up these mandatory evacuations. What's your take on that? I mean, is it worth sticking around? If you're looking at a house that's potentially going to be flooded, there's only so much you can do, right?

Frankel: Like you mentioned, I used to live in the Florida Keys. I lived there for about five years. They're no stranger to hurricanes. I don't know if I can proudly say, but I never evacuated for a hurricane, and we had a few mandatory evacuations while I was there. My wife is considered essential personnel, she works at a hospital, so we had a good reason for staying. But my general feeling is, if you're told to leave, get out, especially if you have young children. My wife, like I said, is essential personnel. If the storm was forecast to be a category three or higher, they made her get out anyway. They shut down [...], seems to be that essential services are still operating, then it's kind of a tossup. Like I said, if you have kids, get out of there. But, my general feeling is, if you're told to leave and it looks like you won't have access to central services, it's not just about the flood damage, it's not just about the wind damage. It's, what if you need help with anything? That's my feeling when it comes to whether you should get out or not. 

Moser: Yeah. I imagine, if you feel like you're well-insured, it probably makes that decision a little bit easier to go ahead and take off, knowing that you really are fully covered. Again, a good reminder, obviously we can't do anything about it right now, but these storms are a matter of when and not if. It's always a good idea to take a look at your coverages there and make sure you've got everything in order. 

Now, we go beyond insurance. I think insurance is the obvious industry here that comes into play for investors. We want to take a look, also, at some of the businesses that will feel the impact of this storm and future storms on the retail side of things. It's interesting to see the two different sides of the coin here. On the one side, I look at companies like Home Depot and Lowe's, for example, and I can't help but think they will ultimately benefit from a storm like this. Most repair materials are going to come from those stores, and people are going to probably stock up a little bit more in the future to prepare for future storms. On that side, you feel like those businesses tend to do OK. 

But on the flip side of that coin, look at restaurants, for example. You think about restaurants, they're not going to ever really be able to recoup those sales. Those are sales that are ultimately lost. You're not going to go to Starbucks the following day and buy an extra coffee because you didn't get one the day before because they were closed. A lot of these restaurants have to really take that into consideration.

How do you feel about that? Is there something you keep an eye on when it comes to retail that you feel like investors ought to keep an eye on here when it comes to these types of storms?

Frankel: It's really tough to say. There aren't very many retailers that are immune. Our local mall was closed for two days this past weekend. That's a pretty wide-ranging impact. One other industry that people don't really think of is real estate investment trusts. I'm a big REIT investor. Public Storage is one that I own, for example. They have a bunch of facilities in Houston, some of which got damaged last year during Hurricane Maria, the one that hit Houston. American Homes 4 Rent is one with a lot of properties in the Carolinas. They could really have some losses if they have excessive damage. Because yes, they carry insurance on their properties. But there's still deductibles, there's still lost revenue, there's other expenses that have to be taken into consideration. 

Real estate, retail, and restaurants -- the three R's -- are the are the big ones that can really be adversely affected by these storms.

Moser: Yeah, I think that's a good way to look at it. I was taking a look at this last week for Motley Fool Money. Growing up in South Carolina, I'm sure you're probably familiar with Bojangles, chicken and biscuits. Everybody likes their chicken spicy.

Frankel: Of course.

Moser: And they've got some good sweet tea, too. But it struck me that Bojangles, about 40% of their stores are located in North Carolina. About 60% of their stores are located in North Carolina and South Carolina. There's a good example of not only a restaurant that is going to feel some pain from this storm, but it's probably going to feel a little bit more pain than a lot of the other bigger concepts out there because they're so concentrated in that one region. So, keep an eye on restaurant and retail when you look at storms like these, to see how they're affected. It goes beyond just the nature of the space. Try to understand where they're located, to understand better the risks involved with investing in them. I wouldn't be surprised at all to see Bojangles, perhaps, report some less-than-stellar numbers here for the next couple of quarters. I have to believe they're somewhat affected by the storm.

Frankel: Yeah, and that doesn't even consider what happens after the fact. Say there's damage to some of the restaurants that keeps them from opening for an extended period of time. We don't even know that yet. American Homes 4 Rent, the one I just mentioned, their business model is to buy low investment [...] definitely qualifies. They have a disproportionate number of their properties in the Carolinas, kind of like Bojangles has a disproportionate number of their restaurants. That's another company that you can really see adversely affected by the storm.

Moser: Absolutely. As a friendly reminder, you can follow us here at Industry Focus on Twitter @MFIndustryFocus. We're taking a listener question today from Jenny on Twitter who asks, "Can you explain what you mean by razor and blade model? That's new to me." This is a question that popped up late last week on an investment that I recently made, Matt, an investment in a company that's not necessarily financials, but I think it brings up a good question for all investors. It's an interesting business model, that razor and blade business model. I was talking about Idexx Laboratories. They are in the pet diagnostics equipment business. 

Essentially, when we're talking about razor and blade models, these are companies that are selling a durable product, a piece of equipment, or what we would call the razor, at a fairly low cost, sometimes even below cost, because they are going to drive sales of higher-margin proprietary consumables that that equipment uses. That's the blades. So, we have the razor and the blade. It's a great business model because it gives you a pretty predictable revenue stream. Typically, the longer that people use that equipment, you can exercise a little bit more pricing power. Certainly, Idexx Laboratories is a company that has done a lot on the R&D side in growing out their offerings. My veterinarian that we take our three dogs to actually uses Idexx equipment. He really could vouch for how good their products and services are. 

Matt, you and I were talking a little bit before taping about a company in the financial market that is kind of a razor and blade model too, right?

Frankel: Right. There's a ton of examples of this outside the financials space that that most of our listeners probably use. Just to name a couple of quick ones, how you buy a Keurig machine, and then you have to buy the K-cups. That's how they make most of their money. Amazon sells Kindles for like $30. They make their money on the actual books that you're buying. There's a bunch of these. My printer, you could buy a printer these days for $20.

Moser: I hate to interrupt, but you brought up Amazon Kindle. It reminds me of the quote from Jeff Bezos, it's just stuck in my brain forever. Bezos always says, "We want to make money when you use our devices, not when you buy our devices." I think that really encapsulates that razor and blade notion.

Frankel: Absolutely. Going back to the financials space, Square (SQ 0.71%), one of our favorite stocks, we talk about it frequently on Industry Focus: Financials, everyone's seen it at their local craft markets and things like that, the little Square card readers. A lot of local coffee shops, things like that, use Square hardware. Square doesn't make much money on the hardware. In fact, they probably lose money on it. Where they make money is the recurring transaction revenue every time that that's used. That's a good example of a razor and blade model. They pretty much give away a product in the hopes that that product will generate a consistent revenue stream, as Jeff Bezos said, when the customer uses it. 

There's examples of razor and blade models in pretty much every sector of the market. It's a very effective business strategy when done correctly. 

Moser: Yeah, I agree. I think the interesting thing with Square, from the perspective of their razor, is really the blades. It's not going to be card specific. Whether it's a Visa, MasterCard, American Express, whatever card you swipe. It doesn't have to be any particular card or proprietary technology, which really opens up that market opportunity for Square the company and for Square investors. I'm a Square investor, a very happy one. I know you are, too. Those who are familiar with me whatsoever probably have heard me mention more than once the war on cash basket of stocks. Square is a very important part of that collection of stocks there, as well. I'm sure we'll talk a lot about the war on cash here on future episodes. But that's for another time.

Listen, let's introduce one feature here. We want to talk about One to Watch. This is an idea that I got, we do this a lot on Motley Fool Money. At the end of every Motley Fool Money, we offer a stock on a radar. I thought it would be fun to do something kind of like that. We're going to give our listeners, every week, what we're calling One to Watch -- a company in the financials space that we've got our eye on for one reason or another. It may be bullish, it may be bearish. You get to tell me what you're thinking there. Hopefully, our listeners will be able to benefit from that, as well. Matt, let's go ahead and start with you. What's one to watch this week?

Frankel: In the spirit of the hurricane discussion, I'm looking at Berkshire Hathaway this week. Berkshire Hathaway's core business is insurance. They have a ton of different businesses. They have a lot of reinsurance businesses. Their reinsurance business got clobbered after last year's hurricane season. I think they had a total of about $3 billion in losses. Well, the estimates for the damage caused by Hurricane Florence are looking like it's not going to be as bad as we expected. Initial estimates said that the storm could cause up to $170 billion in damage if it hit the correct way and stayed strong and all that. Now, the latest estimates are calling for about $18 billion of damage. That's a big difference. That's a lot less that reinsurers are going to have to pay out. Plus, you can't really go wrong with Berkshire, especially their new buyback program. Warren Buffett's essentially telling you, by buying back the stock, that it's inherently worth more than its trading for. So, that's one that's really on my radar, especially as the storm doesn't really look like the damage is going to be as bad as originally thought.

Moser: I like it. That's a good one. It's really hard to bet against Buffett and his crew. We'll give you a bonus here: Markel is another company that I think of when we talk about reinsurance. Great specially insurer, but a meaningful reinsurance business, as well. That's one that really is built in that Berkshire mold. 

I'm going to go a little bit of a different direction here. I'm watching this week a company called Ellie Mae, ticker ELLI. It's a mortgage software provider with a very large and growing presence in its Encompass platform for lenders. They sign up individual lenders, little small boutique lenders. They're even getting big banks. TD Ameritrade, even, is a customer of Ellie Mae's now. Fascinating business. They make their money from not only selling the subscriptions to using their software, but they also make a little bit on every transaction. I think that's really, for me, when the question is coming up here. For a very long time, Ellie Mae has benefited from this tremendous refinance boom that we've witnessed with all of these low interest rates. Now, as we see interest rates start creeping back up a little bit at a time here, I'm starting to wonder if this is going to be something that plays out on their business. 

They are very clear in earnings calls that refinancing is slowing down. They believe that they're going to make up for that on the purchase side. But until they actually show that, we have to at least make some assumptions there. It's a good business. It's not a cheap stock by any means. But it's one that's really built a strong presence in the space in a short amount of time here.

I own shares of Ellie Mae myself. I tell you, I like the business a lot. I'm just a little bit curious as to how they're going to be affected by this slowing down refinance volume. 

Matt, thanks for joining me today! You take it easy, and you guys stay dry out there this week. We'll talk to you next Monday, alright?

Frankel: Alrighty!

Moser: OK. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening! And we'll see you next week!