Will Hurricane Harvey Postpone Fed Tightening?

 | Sep 01, 2017 | 7:00 AM EDT
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Stock quotes in this article:

hds

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mas

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usg

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uscr

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smid

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low

The following is an excerpt from a Stocks Under $10 Alert sent to subscribers on Aug. 31. Click here to learn about this dynamic portfolio and market information service.

Several days after Hurricane Harvey hit Houston, we are still getting estimates as to the extent of the damage that has been done. With rain slated to continue until Friday, those estimates look like a moving target in the upward direction.

Initial estimates are putting the damage into the billions of dollars -- Hannover Re, one of the largest re-insurers in the world, predicted a price tag of $3 billion on insured losses. That's just what's insured. A more encompassing estimate from Enki Research, a group that calculates risks and costs of hurricanes, tsunamis, and other natural disasters, says the "middle-of-the-road" estimate for Harvey costs could be anywhere from $48 to $75 billion. Over the coming days, I suspect we will get a far firmer picture as to how much it will cost Houston and its surrounding areas to recover from this tragedy.

One of the wisest words I've heard in the investing world is to be "cold-blooded" when it comes to one's investments -- don't fall in love with your holdings, and in times of uncertainty or tragedy remain focused. In the case of the Hurricane Harvey disaster, the people of Houston are in all of our thoughts, but we also realize the rebuilding effort to come over the ensuing months will be massive.

Near-term, we're likely to see a hit to the overall economy, much the way we did after Hurricane Katrina hit New Orleans. Accuweather projected it to have a $190 billion impact on the economy, which means we are likely to see a downtick in September and into October. If Accuweather's eye-popping estimate is correct, Harvey would cost the economy nearly as much as Hurricane Katrina and Superstorm Sandy combined. In other words, expect those GDP forecasts to be revised lower, and we could see the Fed hold off embarking on unwinding its balance sheet a tad longer.

Before too long and as the water clears, however, we'll see rebuilding efforts spring forth and that has us eyeing Home Depot (HD) , which has numerous stores located in and around the Houston area. We're also looking at HD Supply (HDS) , the sister company that focuses more on contractors, government entities, maintenance professionals, home builders and industrial businesses than Home Depot. We could look at shares of Lowe's Companies (LOW) as well, but Home Depot has been handily beating it delivering faster top and bottom line growth, and Lowe's lacks the "professional" exposure found at Home Depot Supply.

The issue with all three of these, however, is they fall outside our "under $10" parameter. The same holds true with other companies, like home improvement and building product company Masco Corp. (MAS) , wallboard and ceiling company USG Corp. (USG)  , U.S. Concrete (USCR) and a number of others.

There are some "Under $10 candidates," like Smith-Midland Corp. (SMID) but the trading volume runs the risk of making these roach motel stocks in our opinion. We've seen the pain of that before, and our view is "no, thanks." As the water recedes over the coming days, we'll sharpen our view to uncover other potential candidates.

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