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The compelling connection between Norbord shares and the wrath of hurricanes

Norbord Inc. has handily outperformed the broader stock market over the past two years, which might normally push nimble investors to the sidelines ahead of the next cyclical downturn.

But here's one compelling reason to stay put: Hurricane Irma.

This year's Atlantic hurricane season has been particularly violent, uprooting lives and causing catastrophic damage to parts of the Caribbean and United States.

Hurricane Harvey flooded parts of Houston and caused an estimated $180-billion (U.S.) in damage. Irma, which followed, was one of the most powerful Atlantic storms on record, destroying an estimated 25 per cent of homes in the Florida Keys alone.

Extensive rebuilding needs to be done, and Norbord is one of the go-to names for a key building material: oriented strand board, or OSB, an engineered panel similar to plywood but cheaper and available in longer lengths.

Andrew Kuske, an analyst at Credit Suisse, noticed that Norbord's share price tends to perform well after major storms, outpacing the gains in OSB prices by a wide margin. The rallies kick in one to three months after storms conclude, which implies that there's still more upside ahead in Norbord's stock.

Putting an investing spin on the devastation caused by hurricanes might seem callous to sensitive investors, but I don't see any harm in recognizing an investment that is tied to rebuilding homes and businesses.

And that's Norbord stock in trade. OSB is a dull commodity with a price that fluctuates with supply and demand. Prices rise when the U.S. housing market is doing well, and falls when supply starts to outstrip demand.

Norbord's share price follows the same pattern. The stock plunged 91 per cent in 2008, when the U.S. housing bubble exploded, but has more than doubled over the past two years – including a 35-per-cent gain in 2017.

Mr. Kuske's numbers suggest that the rally isn't over. He looked at 19 named storms that made U.S. landfall in the Atlantic basin from 2012 to 2017, from tropical storm Beryl to the most recent, Hurricane Irma.

He then compared OSB prices and the share prices of OSB producers over various time periods before and after the storms. The week after the storms concluded, share prices, on average, fell. But after three months (a period that does not yet include hurricanes Harvey and Irma), prices surged by an amount that is hard to ignore, and Norbord led the charge.

One month after a tropical storm, Norbord shares were up, on average, 8.4 per cent, and the gains expanded to 11.2 per cent after three months. In the case of hurricanes, which are more damaging, the shares rose 10 per cent after one month and a remarkable 17.3 per cent after three months.

"Clearly, a few factors can impact these performance returns, including: the typical fourth quarter industry downtime; housing related data; and, the overall market," Mr. Kuske said in a note. "In any event, past historical movements may indicate a tactical trading opportunity for players like Norbord."

The seductive part about this historical approach is that it makes sense: If OSB demand is tied to housing, then extensive rebuilding after storms should spur considerably more demand.

Is this trading opportunity risky? Of course. It implies that investors haven't already pounced on this pattern. And it rests on a quirk – that the market is slow to recognize the fact that damaged homes need attention.

More broadly, Norbord shares are going to be influenced by broader trends affecting the U.S. housing market, including the Federal Reserve's rising interest rates and the strength of the U.S. economy.

However, the shares are inexpensive, trading at 8.8 times Mr. Kuske's 2018 profit estimate. And the company is now firing on all cylinders: Over the past 12 months, the company has reduced its long-term debt by about $200-million and more than doubled its per-share profit. In the second quarter, it boosted its quarterly dividend to 50 cents (Canadian) a share from 30 cents a share, giving the shares a dividend yield of 4.3 per cent.

Norbord is a cyclical stock, so the good times won't last forever. But for now, investors should hold on.

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