The Hidden Winners of the Los Angeles Recovery

Robert Ross|January 14, 2025

The Los Angeles fires continue to rage.

I bought a home on the east side of Los Angeles two years ago. We went to bed Wednesday night not knowing whether our home and neighborhood would still be there when we woke up.

Thanks to the heroic work of the Los Angeles Fire Department, the California Department of Forestry and Fire Protection, and the resources from surrounding states and countries, our neighborhood has been spared.

But our community is still at risk… and we’re grieving the loss of areas like Altadena, a working-class neighborhood only a few miles from our home.

However, the show must go on. As an investor, I can’t help but think of how the largest natural disaster… in the most powerful state in the U.S.’s history… will impact the U.S. economy and markets moving forward.

I have a few ideas…

An Unprecedented Disaster

The inferno that engulfed Los Angeles could end up being one of the U.S.’ most expensive natural disaster ever.

Early estimates from AccuWeather pegs the damage at $135 billion to $150 billion. That means the disaster – which isn’t over yet – is spitting distance from topping the $186 billion in damages from Hurricane Katrina.

And that has major implications for multiple stock market sectors.

The insurance sector will undoubtedly feel the brunt of the Los Angeles fires. Natural disasters of this magnitude typically result in significant claims, placing immense pressure on insurers. For instance, Hurricane Katrina caused an estimated $82 billion in insured losses, while the wildfires in California in 2017 cost $13 billion.

The 2025 Los Angeles fires are on track to surpass these figures. Major insurers like Allstate (ALL), Progressive (PGR), and State Farm are likely bracing for billions in claims. Reinsurance companies – those that provide backup coverage to insurers- like Swiss Re and Munich Re will also face significant payouts.

Investors should monitor these stocks closely.

Historically, insurance companies see sharp declines in share prices following natural disasters but often recover as they raise premiums to cover future risks. For instance, after Hurricane Andrew in 1992, insurers raised premiums by 25% to 40%, driving profitability in subsequent years.

In addition, the real estate market in Los Angeles, already one of the most expensive in the country, could face additional strain. Properties in high-risk fire zones may see values drop, while demand for homes in safer areas could drive up prices.

This happened in New Orleans post-Katrina. Some neighborhoods saw dramatic price increases while others struggled to recover.

Investors in REITs with exposure to California, like AvalonBay Communities (AVB) or Equity Residential (EQR), should watch closely for potential impacts on rental income and property valuations.

But there’s good news for investors as well…

Boom Times

Rebuilding efforts in Los Angeles will likely provide a significant boost to construction and materials companies. After Hurricane Harvey in 2017, stocks like Home Depot (HD), Lowe’s (LOW), and Martin Marietta Materials (MLM) rallied as billions were poured into rebuilding efforts across Texas.

California’s rebuilding will likely follow a similar pattern, especially given the state’s strict building codes. The codes often require more expensive materials and advanced engineering. Companies specializing in concrete, steel, and home improvement supplies are well-positioned to benefit.

Investors should also keep an eye on infrastructure-focused names like Caterpillar (CAT) and United Rentals (URI), as heavy equipment and machinery will be in high demand.

Small Caps Could Shine in a Recovery

While the broader market will feel the effects of the fires, small-cap stocks – particularly those in construction, materials, and infrastructure – could see a significant boost.

Small caps are often more agile and better positioned to benefit from localized recovery efforts. For instance, companies like Construction Partners (ROAD) and Eagle Materials (EXP), and smaller infrastructure firms may experience a surge in demand as rebuilding efforts ramp up.

Additionally, with the incoming Trump administration promising deregulation and infrastructure spending, small-cap energy and materials companies stand to benefit from both federal policies and the increased demand driven by the fires.

Small caps also tend to outperform during economic recoveries, and this disaster could act as a catalyst for certain sectors.

Expect the Unexpected

Natural disasters like the Los Angeles fires serve as a reminder of the unpredictability of markets and the importance of a diversified portfolio. Sectors like insurance, utilities, and construction will see significant movement in the coming weeks, offering both risks and opportunities.

As Nassim Taleb aptly put it, “Invest in preparedness, not in prediction.”

Focus on building a resilient portfolio that can withstand unexpected shocks. Diversify across sectors, maintain exposure to defensive assets like gold and cash, and always keep a long-term perspective.

While the fires are a tragedy, they also highlight the strength and resilience of both communities and markets.

Recovery efforts will bring new opportunities… and investors who stay informed and disciplined can navigate this challenging time effectively.

Editor’s Note: Market-moving events like Los Angeles remind us that major shifts create both challenges and opportunities across multiple sectors. Whether it’s construction companies during rebuilding or small caps during recovery, knowing where to look is critical.

That’s why we’ve just released details on three distinct sectors showing potential for significant growth in 2025. With President-elect Trump taking office next week… now’s the time to get in. Details here.