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Nearly three weeks after Sandy hit the New York-New Jersey area, the tally of losses from the devastating storm keeps going up.

We now know the storm claimed more than 100 lives, along with thousands of homes and businesses. Estimates of property damage now range up to $90 billion, and that may still be low. Basic services like power have yet to be fully restored to all areas.

But it's not too early for investors and companies to start thinking about the impact of Sandy on the overall economy, sectors and stocks -- and the potential profits from the vast amount of work ahead. That's particularly true if we really are seeing an increase in extreme weather events, because these same companies stand to profit again and again.

So, with all due respect to those still suffering, including many of my fellow New Yorkers, here's a look at the potential winners and losers as we pick up the pieces after Sandy.

The macro view

Big picture, natural disasters typically tend to boost economic growth, because reconstruction adds more to the gross domestic product than the destruction of assets and net wealth takes away, concludes Credit Suisse global equity strategist Andrew Garthwaite, who has looked at the impact of several big disasters over the past decade.

So expect an initial dip in economic growth, followed by an increase above where the economy might have been without the rebuilding.

As for stocks, several kinds of companies obviously benefit from a big storm. And there's a big difference this time from past disasters.  

The big knock on "hurricane stocks" is that gains are one-off. But I doubt that's the right way to look at this anymore, for a simple reason. Given all fires, droughts, tornadoes and hurricanes we've seen in just the past couple of years, it seems pretty clear that because of climate change -- whatever the cause -- we're in a "new normal" for extreme weather.

Sandy was the second big hurricane to hit the New York City area in a year, following Irene. "We are now two-off, not one-off," says Stu Feldstein of SMR Research, a market-research firm in Hackettstown, N.J. "Things are looking pretty weird out there. Climate change could be for real."

New York Gov. Andrew Cuomo remarked that "we have a 100-year flood every two years now."

If you agree we now have a "new normal" for weather, there are two clear implications for investors. First, companies like Home Depot (HD) and Lowe's (LOW) get more of a rolling benefit than a one-off boost.

Second, utility companies and policymakers are going to realize at some point that we can't just keep repairing the damage caused by storms, only to do it over again in a year after the next one. Instead, it's time to rethink, redesign and harden our infrastructure against natural disasters. This could include installing storm surge barriers like those used around London, burying utility wires, installing better pumps in underground tunnels, and covering electrical components in the electricity grid and mass transit systems.

This suggests a steady stream of demand for construction-engineering companies and their suppliers, as a medium-term trend. The American Society of Civil Engineers already gives U.S. infrastructure a "D" grade. Sandy, in other words, really just exposed some big underlying spending needs. Even Washington's would-be budget cutters can't ignore this forever. (For another view, see Jim Jubak's "Rebuilding after Sandy? Maybe not.")

When looking for stocks that should profit from Hurricane Sandy-related rebuilding, I considered both of these big-picture trends, as well as the ongoing recovery in housing and the economic growth of emerging markets. Here are the companies and sectors poised to benefit.

Home Depot and Lowe's

When a natural disaster like Sandy strikes, homeowners flock to Home Depot and Lowe's to buy lumber, gutters and roofing materials, dehumidifiers, pumps, generators, cleaning supplies and more.

For both chains, sales at stores open more than a year, the golden metric in retail, jumped about a percentage point in the month following Irene, says Stifel Nicolaus analyst David Schick. A "new normal" of more extreme weather events will continue this trend.

But these two are not just natural-disaster plays. They benefit from other trends, too. One is the ongoing strength in housing, where the current recovery is no head fake, say many experts. "The housing market is looking pretty sound. I think it continues on," says SMR Research's Feldstein, who accurately called both the housing collapse and the ensuing rebound, ahead of most other analysts. "We have a gradual recovery taking place in both sales and home prices." This should continue to cap foreclosures, which have been declining steadily for several quarters, taking pressure off home prices.

"We believe the likelihood of an even more robust recovery has increased," says Morgan Stanley analyst David Gober. Morgan Stanley says home prices could increase 9% this year and 6% next year. This should help support home improvement sales growth of 5% to 6% in 2013 and 2014, says Gober.

Another trend helping Home Depot and Lowe's is ongoing consolidation. "The large, fragmented home-improvement market provides an opportunity for both companies to expand profitably well into the future," believes Morningstar analyst Peter Wahlstrom.

Richard England, the portfolio manager of the Calvert Equity (CSIEX) fund, prefers Lowe's because it's cheaper. Lowe's stock goes for 15.5 times next year's earnings, compared with 17.8 for Home Depot. Plus, Wall Street analysts haven't fully factored in ongoing merchandising improvements at Lowe's, believes England. This means Lowe's will earn more next year than analysts expect, he says, so its real forward price-earnings ratio now is more like 16.

In simple terms: Lowe's is even cheaper than it looks, relative to Home Depot.

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 Building materials

Two other housing-related companies to benefit both from ongoing natural disasters and the housing rebound are Eagle Materials (EXP) and USG (USG). Together they dominate the U.S wallboard market, and they've been boosting prices lately. Eagle is the low-cost wallboard producer, and it dominates many of its regional markets. It also sells cement. USG also sells ceilings, tiles and flooring. Warren Buffett's Berkshire Hathaway (BRK.B) owns a 33.5% stake in USG -- and bailed it out during the worst of the credit meltdown.

Infrastructure and construction engineering

"I have some advice for our leaders in Washington," says Ed Yardeni of Yardeni Research. "Next time you folks decide to spend $800 billion to stimulate the economy, do so on a national infrastructure program to bury all the power, phone and cable lines."

Indeed, it seems dumb to repair power and cable lines downed by falling trees during this storm, then do it again with the next big storm.

With incidences of harsh and unusual weather increasing, power line repairs aren't the only investment we'll be making over and over again in the power grid. Substations also get flooded, damaging equipment. Transformers blow up.

At some point, politicians, utilities and transit companies will wise up and make significant changes in infrastructure to adapt to the new, harsher weather. This might include the installation of streets made with porous concrete and drainage systems that get rid of excess floodwater quickly, the hardening or relocation of power transformers and equipment to protect them in storms, and perhaps even the use of sea walls.

"Sandy refocuses everybody on one word: infrastructure," says Dan Veru, the chief investment officer at Palisade Capital Management, which manages the Pyxis Small-Cap Equity (HSZAX +0.56%, news) fund. He thinks one company that should benefit here is Quanta Services (PWR), which installs and repairs power and telecom infrastructure and natural gas distribution systems. "Some places could be as much as a month without power. People are going to start talking about the aging grid," says Veru.

Next, consider General Cable (BGC), which sells wire and cable. It specializes in cables for harsh environments. So it seems like a natural play on the "new normal" in weather. But it also sells the regular wire used in power grids. General Cable has been expanding in areas with less-developed infrastructure in Asia, Latin America and Africa, where an emerging middle class will increase electricity usage big time, leading to grid overhauls. So General Cable is an emerging-markets play, as well as a natural-disaster play.

Infrastructure upgrades also will drive business to construction engineering companies such as Granite Construction (GVA), which handles projects such as roads, bridges, airports and dams; Aecom Technology (ACM), which helped design the London Olympic Park and the California high-speed rail system; and Sterling Construction (STRL), which focuses on transportation and water infrastructure, including storm sewers and flood control.

One knock on these companies has been that they get a large portion of their sales from governments, which are under budgetary pressure. But politicians may find new priorities if more people complain to them about hardships from the destruction of the infrastructure by natural disasters.

Generators, pumps, filters and water systems

Obvious hurricane plays include companies that sell generators and pumps. Generator maker Generac (GNRC) spiked recently on good earnings news and Hurricane Sandy, rising above $38 from below $28. I'm not sure I'd buy right now, after this spike, except as a long-term hold. But this won't be the last natural disaster to drive up demand for generators.

Cummins (CMI), another play here, is primarily known for the sale of engines used in vehicles, but it also sells generators and filtration systems.

Xylem (XYL), which sells pumps and equipment used in water treatment, testing and filtration, is a pure-play water company. It should get a boost from Sandy because of all the water-related equipment destroyed by the storm. But Xylem is also a long-term play on the ongoing upgrade of antiquated water systems, says Russell Croft, portfolio co-manager of the Croft Value Fund (CLVFX). He thinks the stock looks reasonably priced at 13 times earnings, since it will grow profits at a double-digit pace for the next few years. About 40% of revenue comes from aftermarket replacement parts, so Xylem has some fairly predictable recurring revenue, adding an element of safety here.

Pentair (PNR) sells pumps, water-filtration and purification systems and enclosures that house electronics. Thus it's a play on natural disasters in several ways. Pentair has a partnership with the water division of General Electric (GE), which gives the company access to GE technology and customers.


Insurers have an odd relationship with natural disasters. Short term, disasters hurt because they mean payouts. Long term, insurers may benefit if natural disasters take enough capacity -- or capital -- out of the insurance sector. In this scenario, they can raise prices.

But Sandy doesn't really tip the scales either way for investors in property and casualty insurers like Chubb (CB), Travelers (TRV) and Allstate (ALL), says Stephan Petersen, an insurance sector expert with Thrivent Financial for Lutherans.

The losses aren't big enough to hurt them badly, or to reduce capacity enough to boost pricing power. Homeowners have been facing rate increases in the 8% to 10% range, but that trend is not likely to get worse because of Sandy. "I don't think this is significant enough to change the trajectory of what is going on," says Petersen.


It seems as if utilities serving the areas struck by Sandy, including Consolidated Edison (ED), Public Service Enterprise Group (PEG) and FirstEnergy (FE) should take a big hit, because so much of their equipment got destroyed. But it's not that simple.

While utilities' fourth-quarter revenue will go down and costs will spike near term, in the long run regulators will let them recoup the costs by charging more, points out Morningstar analyst Travis Miller. Not only do customers go without power for weeks. They have to pick up the tab on the damages, too.

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At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column. .

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.