Bad weather has been repeatedly cited this year as the cause for everything from lackluster retail sales to stagnant job growth. In much of the country, 2013-14 has been the worst winter in terms of average temperature and snowfall in more than 30 years.
I realize that I will get no sympathy from readers in the upper Midwest, but even here in Dallas it’s been a brutal winter. Dallas lost so many trees in the last ice storm, you could be forgiven for assuming a tornado had touched ground.
But if we have to suffer through the cold, we might as well find ways to profit from it.
I chatted with Varney & Co.’s Stuart Varney this morning about stock picks that investors can make to take advantage of the terrible weather.
At the top of the list is natural gas. Natural gas futures enjoyed a bounce of about 50% in late January, as short-term supply bottlenecks caused prices to spike. We might see natural gas go sharply higher as the cold weather lingers.
But be careful here. Given the abundant new supplies of natural gas coming to market, natural gas prices should stay depressed for a long time to come, this short-term spike notwithstanding. Another factor to consider is contango, which is common problem for commodity ETFs and ETNs. When a market is in contango, investors lose money every month when they roll over their futures contracts in what is called a “negative roll yield.” This might be tolerable when prices are rising rapidly. But it can come as a shock to the uninitiated trader. Contango has been a major drag on the returns of the United States Natural Gas Fund (UNG), for instance.
Given the amount of damage done to homes and gardens by the winter weather, I suggested that Home Depot (HD) and Lowe’s (LOW) would be good stock picks. While neither are particularly cheap at current prices, LOW and HD stock are good long-term plays on the recovery of the U.S. housing market and the family formation of Generation Y.
Stuart Varney took it a step further, mentioning Toro Company (TTC), the maker of many of the snow blowers that have become a common sight across much of America this year. I agreed, adding that Toro is a major manufacturer of lawn and turf maintenance equipment — and because virtually every lawn, park and golf course in America has suffered damage this year, and Toro is well positioned to profit from the repairs.
Toro stock is by no means cheap — it trades for 24 times earnings — but it has been growing its revenues and profits at a healthy clip since 2010 and sports an impressive 46% return on equity.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.