The United States, particularly in the northeast, has had a record winter. The unusually strong El Niño meteorological effect has caused most of the northeastern part of the US to enjoy extremely warm weather over the past two months.
Normally places such as Boston and Cleveland would already have had massive snowstorms, but this year, it’s been totally different. In place of the traditional white Christmas, it’s been sixty degrees and shorts for much of the country.
As you would expect, investors have sought to position themselves to profit from the unusual heat. The easiest way to profit, in fact, has been by betting against products and companies that rely on cold weather to make their profits.
The most obvious victim has been natural gas. Already, natural gas had suffered a very bad 2015. The price of natural gas has been sliding pretty much relentlessly throughout the year. But the decline turned to a freefall come November, as an unending streak of warm weather dampened demand for natural gas.
Traditionally, natural gas inventories build during the summer, when there is less demand, and then inventories are depleted during the winter, when there is heavy demand for home heating. However this year, inventories continued to climb into December, well past normal, and inventories sit near all-time highs, with the country’s storage capacity almost full.
Until recently, there’d even been talk that storage could fill up entirely, leaving producers in a tight spot with literally nowhere to store further natural gas. However, since Christmas, the weather has turned dramatically colder, when much of the northeast now below freezing, and many areas experiencing their first heavy snowfalls of the season.
Natural gas responded in a big way, with prices rebounding 30% over the past week; a sharp recovery from the decade-lows. While there is no reason to expect a sustained rebound in natural gas yet, the worst outcome is off the table. It isn’t going to stay warm forever, people are going to have to use their furnaces this winter after all.
Other stocks that have been hammered on the hot weather may enjoy similar changing fortunes. Let’s discuss a few opportunities.
Polaris is one such clearly weather-jinxed stock. The company is a leading manufactured of off road vehicles and snowmobiles. Snowmobiles have been the problem recently, as sales in the eastern part of the US have been way down. A strong winter in the west has offset this to a small degree, but Polaris is still looking at sales of snowmobiles dropping by 15% in the 2015-16 season versus last year.
If the drop in snowmobile sales were a permanent condition, the fall in Polaris’ stock might be justified. However, this is simply a one-off event. There will be good winters and bad winters. You could argue there may be less snow over the long run due to global warming, but that will be a very gradual effect.
It simply won’t be 60 in the Adirondacks most winters in December. Snowmobile sales will be back to normal next winter. At a 12 PE and 2.5% yield, Polaris looks like a bargain here. The stock is down by 50% since this summer. July’s $160 price may have been too lofty, but the current figure in the 80s is much too low.
Similarly, ski resort operator Peak Resorts has faced some tough sledding this season. Shares are down 20% over the past month, and were recently down more before enjoying a bounce following the first significant snowfall.
Peak Resorts is the operator of more than a dozen smaller ski resorts primarily in the midwest and northeast. Shares have sold off sharply as snows have failed to arrive in the northeast on schedule. The company’s flagship Mount Snow resort in Vermont could more accurately have been named Mount Slush recently, as rainfalls kept melting the machine-generated snow the resort tried to produce.
Short sellers piled into the company, betting the lack of snow would ruin the season and cause the company to have to cancel its vaunted 9% dividend.
However, the company doesn’t generate that much revenue between Thanksgiving and Christmas, the company’s prime skiing season is coming up now in January. And it’s finally begun to dump snow on the company’s resorts over the past week.
Shares have started to recover since Christmas, but there could be a lot more upside to come. If Mother Nature cooperates, it wouldn’t be surprising to see the company regain most of its recent losses. There was a great trade betting against things such as natural gas or vendors of goods such as snowmobiles, winter clothing, or season passes at ski resorts. But with the warm stretch winding down, it’s time to invest in winter again. With snow finally here, it’s time to think about taking positions in companies that benefit from the cold.
