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Hurricane Sandy is barreling toward the East Coast today and should continue to wreak havoc into Tuesday. Many investors are cynical about insurance companies like Allstate (NYSE:ALL) and high-on companies like Coca-Cola (NYSE:KO) and Home Depot (NYSE:HD). In order to properly value these companies, it is important to track the damages Hurricane Sandy actually causes.
With a company like Allstate, it is extremely important to monitor the number of deaths and total damage caused. In August 2005, Hurricane Katrina was much worse than people expected, causing $81 billion dollars in damages and 1,833 deaths. As a result, shares of Allstate went from $58.27 the week preceding Katrina to $54.53 the month after as investors worried about the number of expensive claims being made. However, with Hurricane Isabel in 2003, which only caused 16 deaths and $3.6 billion in damages, Allstate shares actually rose from $37.48 the preceding week to $40.10 a month after.
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With marked improvements to the Federal Emergency Management Agency (FEMA), it is highly unlikely that the death toll of Sandy will reach that of Katrina, but property damages are impossible to predict.
A company like the Home Depot would seemingly be primed to spike in the aftermath of Hurricane Sandy, but while this is true, there is a snag. In relatively moderate hurricanes such as Isabel in 2003 and Hurricane Charley in 2004 — which had only 10 deaths, but $15.4 billion in damages — shares of Home Depot rose by an average of 11.5 percent the month following the disasters. However, after Hurricane Katrina, shares actually fell 3 percent the following month. This difference is because many residents hit by Katrina decided to move rather than rebuild their homes. Also, areas were more concerned with finding survivors than fixing property.
Next up are soft drink companies like Coca-Cola. While conventional wisdom would suggest that people buy water prior to and after a hurricane, the numbers show that there is really no significant growth in share price following hurricanes. In fact, Coca-Cola shares actually fell 9 percent the month following Hurricane Charley in 2004.
In regards to insurance and home improvement stocks like Allstate and Home Depot, it is important to carefully follow news updates of deaths and damages caused by Hurricane Sandy to adequately value these companies. Meanwhile, bottled-water distribution companies like Coca-Cola are better to avoid altogether.
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