The Buckingham Report

With estimates that the federal government may now spend as much as $150 billion to $200 billion dealing with the aftermath of Hurricane Katrina, investment publications are rife with advice on how to profit from the catastrophic storm and subsequent flooding. Heck, on Tuesday, The Wall Street Journal proclaimed “Katrina Forces Investors to Rethink Fall Strategies.” The inference is that we should be gravitating to sectors likely to benefit from the tragedy, including oil refining and marketing, manufactured housing, construction/engineering services and building products.

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Certainly, as the chart above illustrates, stocks in those areas have performed very well and we are happy to have enjoyed our share of the investment windfall as a result of Katrina, even as our hearts go out to all of the victims. Despite their heady gains, I continue to believe that all 19 of these Prudent Speculator recommendations remain relatively undervalued, but I urge investors to continue to pay attention to financial fundamentals and avoid being blinded by visions of riches from Katrina-rebuilding plays, especially from those companies that happen to trade among the infamous pink sheets.

Illustrating my point, a Katrina-related investment idea arrived via our fax machine on Tuesday. Actually, we received multiple copies (it must have really been hot to warrant so many faxes) of a one-page missive championing a company called National Storm Management (NLST). The report, which screamed, “KATRINA MEANS NATIONAL STORM IS POISED FOR A MASSIVE RUN AS DEMAND TO REPAIR HOMES SKYROCKETS,” came from an outfit called Hot Stocks on the Street. The fax hinted that NLST might receive 1% of the repair work (or $260 million of the $26 billion in estimated insured damages) and that your "aggressive position...could do exceedingly well.”

Given that the stock was trading for $0.55 prior to Katrina and had rocketed above $2.00 by the time our copies of the fax arrived, we decided the company warranted a closer look for possible usage in this Buckingham Report. Surprisingly, seeing as how most subjects of these Pump-and-Dump type schemes have none available, we were actually able to obtain financial statements and other operational data on the company. What we found was that NLST does not even have any operations in the storm affected areas as its offices are in Illinois, Florida, Missouri, Minnesota, Maryland, and Ohio.

In addition, their work focuses almost exclusively on roof installations and repairs. In the pictures of the destruction in New Orleans, the parts of the homes one sees that seem the most intact are the roofs people are sitting on waiting for rescue. That is not to say there will not be significant roof repairs, but they will be done by local companies that do not have to burn some very expensive fuel to ferry all of their building supplies and materials from some remote location. The other likely scenario is a complete rebuilding of many structures by companies that will take responsibility for every part of the new building. Not exactly the golden business opportunity for NLST that might initially be thought.

Red flags in their financial statements like $272,000 in advances made to employees and $111,000 spent on a Mercedes as a company car only add to our skepticism. Now, I do not mean to say that the company might not one day be able to justify the recent trading range (revenue supposedly rose to $8.8 million in the first half of 2005, up from $3.6 million in the year-ago period), but this is not our kind of stock.

Sadly, for many of the now poorer folks who acted on the report, reality is starting to set in as the stock, which traded as high as $3.20 on September 6th, has since plummeted to $1.45. Certainly, a handful of day traders were able to make money on the wild trading in NLST, but it is likely that Hot Stocks on the Street, which was compensated $100,000 for “gathering information, preparing this report and arranging distribution,” and the certain non-affiliated shareholders of the company who paid the hundred grand will end up as the big winners.

I know that many speculators will remain on the prowl for overlooked Katrina plays, but historically speaking, chasing hot market trends and sectors has often been disastrous to an investor's financial health. Going against the crowd has usually offered outsized returns and I actually think that long-term oriented investors more likely will be Walking on Sunshine if they focus instead on an "Anti-Katrina" portfolio we detail below.

 
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Given our contrarian investment bent and because so many of the companies likely to see Katrina benefits have already had big bounces, this listing contains insurance companies, retailers, transportation-related concerns and other consumers of petroleum products - precisely the sectors likely to suffer as a result of Katrina. Of course, just as the winners are already factoring in Katrina-related business improvement, the share prices of these 13 undervalued stocks already discount a good chunk of the bad news (compare the financial metrics detailed in the two charts to see what I am talking about) and they have definitely been left behind in the post-Katrina market rally.

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The information contained herein is believed to be reliable. However, such information has not been verified by us and we do not make any representations as to its accuracy or completeness. Neither the information, nor any opinion expressed, shall be construed to be or constitute an offer to sell or a solicitation of an offer to buy any securities. Opinions expressed are those of John Buckingham, which are subject to change and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. Past performance is no guarantee of future results.

You should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels.

Previous, successful recommendations may not be indicative of the results for all past recommendations. Certain previous recommendations have not resulted in profit, and in fact have resulted in losses. For a full listing of all past recommendations in TPS please visit the TPS website at www.prudentspeculator.com .

Investing in securities of small and medium-capitalization companies involves greater price volatility than large-capitalization companies.

Short term performance, in particular, is not a good indicator of future performance, and an investment should not be made based solely on returns.

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About Al Frank Asset Management

Al Frank Asset Management, Inc. (AFAMI) is an Investment Adviser, registered with the Securities & Exchange Commission and notice filed with the State of California, is editor of The Prudent Speculator (TPS) newsletter, editor and publisher of The Prudent Speculator TechValue Report (TVR) newsletter, and is the Investment Adviser to two value oriented no-load proprietary mutual funds.

Al Frank Asset Management, Inc. is committed to assisting our customers build wealth. We are a leading resource for value-based investor information in the financial community, where we combine our simple, proven philosophy of buying under valued securities for their long-term appreciation with our experience, hard work, and intensive research to give you actionable investment information that can be used on a daily basis.

For information on separate account management, please call us toll free at (888) 994-6827. Or, visit us at www.alfrank.com.