Build portfolio with rebuilding-oriented firms

That’s the equivalent of the scope of the Gulf Coast being struck by Hurricane Katrina, a fact of geographic magnitude that didn’t register with me until it was expressed in those terms.

Another way to gain perspective on the wide area of destruction is to realize that it is equal to a 100-mile band with Interstate 70 in the center that goes from St. Louis to Kansas City. With initial limited coverage of the Gulf Coast regions outside the city of New Orleans and with the media concentrated in the Crescent City, it was easy to overlook the enormity of the area severely impacted by the storm.

The human costs have been staggering. With years of rebuilding ahead of the area, who can say when, or even if, the residents will return to those towns? It will be a long, long, difficult process.

The economic costs to the country are now being assessed. Some in the media, as they are wont to do, have looked for the worst, speaking and writing of the likelihood of a recession. Most economists, on the other hand, are estimating that the economy will absorb the shock of Katrina, suffering no more than a .05 percent decline in the Gross Domestic Product. If the markets are to continue to be predictive of future economic activity, then what are they indicating?

The immediate market reactions were to drive energy costs higher, as the shortage of crude oil and the damaged refineries exacerbated the shortage at a time when the supply part of the equation had already been strained.

As the almost unimaginable amount of coastal destruction started becoming apparent, the markets began the discounting process, pricing assets to reflect the investors’ perception of future values of everything from oil to coffee to cruise ships’ cash flows to travel-related companies’ earnings, etc. For many it was knee-jerk reaction time. For others it was time to back away, keep some cash reserves and take some time to form more reasoned opinions and strategies as facts, rather than fear and greed, unfolded.

One of the first areas of significant longer term concern was whether the impact on the economy would cause the Federal Reserve to suspend its “measured approach” to fighting inflation with small – generally a quarter of a point – interest rate hikes. The consensus, reflected in the lower rate for government obligations, is that Mr. Greenspan will pause in his pursuit of conquering inflation through raising the Fed Funds rate, but he is not ready at this point to end the increases.

For serious investors who ponder which companies and industries will benefit from the monumental rebuilding tasks that lie ahead in the stricken region, the list is extensive. Housing, roads, bridges, office buildings and tourism-related facilities all must be reconstructed. That involves steel, earth moving, levee rebuilding, cement, lumber, engineering, trucking – a long list of industries. And don’t forget the labor – skilled and unskilled – necessary to complete the projects.

Among the companies that will be involved for a long period of time are Halliburton (sorry, left-wingers), Schlumberger, Baker Hughes and Weatherford International. Although they are good long-term holdings, they have already moved up in price, so be patient. Ideally, a pullback would present a better buying opportunity.

Among the raw materials companies check out Cemex SA, Florida Rock Industries, Rinker Group and CRH PLC. Again, they are being heavily bought now, so consider letting the short-term traders and speculators settle down.

Weyerhaeuser, Plum Creek Timber and Louisiana-Pacific Corp. are candidates in the building materials area. Toss in Home Depot (it was attractive even before Katrina) and Lowe’s for good measure. Although it recently received a downgrade from a Wall Street analyst, we like Caterpillar for the long haul. Deere and Kubota are also worth considering.

If you invest in these companies for the long run, don’t just buy them and ignore them. It is not uncommon for even good long-term investment to become priced irrationally high, especially when the short-term-performance-oriented institutions and mutual funds go after them. Look at the individual companies’ ranges of valuations relative to earnings growth rates and price-to-earnings ratios, or have your professional do it for you.

And don’t forget the weather. God forbid that the Gulf Coast should get hit again, but hurricane season goes through November, and …

Clark Davis is a 34-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.

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