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Clean Up Like a Robber Baron After Hurricane Sandy
Do you remember the robber barons from high school history? Men like Andrew Carnegie and John Rockefeller, who made their money building America.
Carnegie made his money in steel, John Rockefeller in oil, and Cornelius Vanderbilt in railroads.
J. P. Morgan, on the other hand, was in finance – not an industrialist. But he was at the center of the action by providing the capital to drive the growth. In 1882, Morgan drove the financing for the very first centralized power generating station in the United States for Edison Electric.
This company, which is now Consolidated Edison (NYSE: ED), provided electrical lighting to the streets of New York City for the first time. These robber barons took advantage of competitors’ weaknesses to buy infrastructure companies at low prices – long-term, cash-generating, low-risk companies.
So what does this history lesson have to do with Hurricane Sandy?
Sandy introduced the fear – and weakness – to allow long-term investors to buy these stable cash generators at a discount.
For the last two weeks, we’ve seen articles trying to handicap which companies would benefit from hurricane Sandy. This may be a way of making money if you’re glued to your screen and don’t mind trading on speculation, but we think there’s a saner approach for investors. Follow the money and look for stocks that offer a superior yield. As my colleague Marc Lichtenfeld pointed out last week, cash is king and these stocks will pay you for waiting out the storm…
Buying on Temporary Weakness
Utilities and insurance companies started trading off as the storm was approaching and as the extent of the damage was realized, the stocks felt another wave of pressure. However, this may be an opportunity to buy rather than a reason to sell, especially if you’re an investor rather than a trader.
Why? Yields are up and the viability of the companies isn’t in question. Essentially, you will be paid – through dividends – to ride out the storm.
Fitch’s rating service hosted a conference call on November 8 stating that it doesn’t anticipate changing the debt ratings of insurers as a result of Hurricane Sandy. This means that the debt rating agency believes that any impact on profitability will be short-lived and the company is as likely to pay its debt payments as it was before the storm. Will there be fallout from Sandy? Of course, but paying down the claims won’t change the structure of these companies.
Utilities companies are likely to see earnings pressure, as well. At the peak, there were 8.4 million people without power in 21 states, 2.1 million of which were in New York. Consolidated Edison has been particularly hit hard, having customers without power up to two weeks after the storm.
This environment of fear hasn’t been helped by politicians who are appearing on television chastising the power companies. This bad press continues to chip away at the stock price, but the fact remains that these are regulated monopolies. They have to apply for a rate increase, and New York isn’t using less power. Usually when you see pricing and volume go up, profits will, as well.
By focusing on companies offering a good yield, investors are paid for waiting while the business recovers to pre-crisis levels. As the business recovers, profits improve and share prices are likely to follow.
Which Companies Look Best, Worst?
The robber barons built their fortunes by investing in infrastructure companies like Consolidated Edison. We may have missed the early trade (about 100 years ago), but we can take advantage of temporary weakness to buy in now.
The insurers and power companies listed below have exposure to the storm-covered regions:
| Company | Ticker |
Price |
%off of recent high |
Dividend Yield |
| Insurance | ||||
| Allstate | ALL |
38.55 |
9.9% |
2.3% |
| Chubb | CB |
74.17 |
9.3% |
2.2% |
| Tower Group | TWGP |
17.56 |
13.9% |
4.3% |
| Utilities | ||||
| Northeast Utilities | NU |
37.96 |
5.8% |
3.6% |
| Consolidated Edison | ED |
55.12 |
8.9% |
4.4% |
Each has come under pressure recently and is offering a better yield than the 10-year Treasury. Consolidated Edison has been accused of aggressive accounting practices, including low pension reserves, and with the yield difference at less than 1%. For that reason, we would favor Northeast Utilities (NYSE: NU) over Consolidated Edison for more risk-averse investors. If Consolidated Edison approaches a $50 share price, which would bring the yield closer to 5%, we would be more tolerant of the extra risk.
The insurance companies are another story, however, since they share their risk with reinsurance companies. Tower Group (Nasdaq: TWGP) recently announced quarterly results and missed EPS expectations by $0.01 in a quarter that showed no impact from Sandy. This raises a red flag since the coming quarter will be the test of a company’s ability to manage operations in a difficult environment.
Instead, I’d look harder at companies like Allstate (NYSE: ALL) and Chubb (NYSE: CB). Allstate for its breadth of product and Chubb for its reputation as the premier home insurer.
As always, it pays to go against the crowd.
Good Investing,
David
Founded in 1999, the goal of Investment U is to give you impartial, no-nonsense investment advice and investment research on how to build long-lasting wealth.
2012-11-13 21:44:17
Source: http://www.investmentu.com/2012/November/clean-up-like-a-robber-baron-after-sandy.html
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