Freakish Winter Freezes Some Profit Plays, Heats Up Some Others

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This article was supposed to be about investments that would allow you to profit from the typical cold-and-snowy weather that's part of the winter routine at this time of year.

But as everyone from Southern California to the Middle Atlantic East Coast states, and the Great Lakes to the Deep South, is painfully aware, this year's winter has been neither "routine" nor "typical" – not by a long shot.

Indeed, the so-called "snowpocalypse" of 2010 has been so fierce that pundits have already coined new terms to describe it. This run of winter bluster has actually nullified some of the usual "winter plays" – those that can be found almost every year – while at the same time creating other opportunities you might not ordinarily think of.


Not the "Same Cold Story"

For example, in most years, when the first big snowfall of the season rolls in, procrastinators realize they need new coats, scarves, gloves and other cold-weather accoutrements, and head down to their local retailer to stock up. That boosts the sales of department stores, as well as such specialty players as Dick's Sporting Goods Inc. (NYSE: DKS). The stepped-up shopping activity also prompts restocking orders for such winter-apparel makers like Columbia Sportswear Co. (NYSE: COLM) – which sends the prices of the associated stocks higher.

This year, forecasts of the impending harsh winter prompted optimistic earnings forecasts for many of these companies and drove stock prices to new 52-week peaks in mid-December. Prices then slid a bit, waiting for a new surge when winter's worst finally arrived.

But then a funny thing happened (though no one was left laughing). Winter's worst proved to be far worse than imagined, with as much as five feet of snow burying much of the nation – from Texas through the upper Ohio Valley, to the Mid-Atlantic Coast, and lower New England – in back-to-back-to-back storms.

Life ground to a halt, transportation systems found themselves parked, commerce ceased and – instead of the widely anticipated new round of sales and healthy winter profits – businesses experienced lost revenue and higher costs for everything from employee absences and parking-lot plowing to rooftop shoveling and pipe replacement.

Retailers with operations concentrated in the affected areas – like Dick's, Bon-Ton Stores Inc. (Nasdaq: BONT), and BJ's Wholesale Club Inc. (NYSE: BJ) – reported revenue losses of 15% to 30% in the first 10 days of February. That was a hard pill to swallow for many, like Bon-Ton, which had just reported a 5.3% increase in same-store sales for January – especially since the likelihood of making up the lost sales was slim.

Dan Hess, chief executive officer of the retail research firm Merchant Forecast LLC, told The Associated Press that many malls, department stores and specialty stores suffered losses of 10% to 25% during the week of the first storm, which would have a lasting impact on profits.

"When it happens in the slow months of January and February, you don't make that business back," Hess said.

Given that realization, the best winter play among the retail stocks may be to wait for the storm-related losses to be factored into the first-quarter earnings forecasts – and the stock prices – then buy in anticipation of a spring bounce.

Playing for the "Spring" in Profits

One stock that strategy could work well for is V.F. Corp. (NYSE: VFC). The company is more diversified than many makers of winter outer wear (North Face is its best-known brand in that category) since it also owns Wrangler jeans, Vans footwear and JanSport luggage.

As a result, its stock price hasn't taken a major hit due to the weather, standing at $74.40 recently compared to a 52-week high of $79.79. It also announced fourth-quarter and full-year earnings on Feb. 9, reporting a profit of $461.3 million, or $4.13 per share, in spite of a 5.8% drop in sales to $7.14 billion, which it blamed on the weak 2009 economy. Management forecast a reversal of that trend in 2010, predicting sales growth of 2% to 3% and earnings growth of 9% to 11%.

The need for increased cleanup, repairs and parking services in the retail sector due to the abnormal snowfall and excess melt-off could also benefit ABM Industries Inc. (NYSE: ABM). This New York-based company provides engineering and maintenance services and manages parking for office buildings, shopping centers, retail stores, medical facilities and even airports. The storm residue could generate both added work and new clients, with the increased revenue giving the stock – currently trading just above the $20 level – a healthy boost.

Going Short … on Supplies, That is

Another area where traditional winter-investment strategies haven't paid off this year has been in the heating-fuels sector – primarily natural gas and heating oil.  Although demand obviously went up sharply during the storms, suppliers were ready. The NYMEX division of CME Group Inc. (Nasdaq: CME) reported last week that natural gas supplies were still well above seasonal norms, explaining why futures for March delivery were priced at just $5.44 per million British thermal units (MMBtu) – down from a high of $6.00 in mid-December. Heating oil is also down by nearly 30 cents per gallon from its late-2009 high, with the only real supply problem right now being how tough it is to make deliveries over snow-blocked roads.

By contrast, there were widespread shortages of more intimate heating products. Duraflame and other lesser-known fireplace logs were reportedly sold out everywhere on the East Coast – with wholesale supplies completely depleted and no new inventories expected until March.
 
The same was true of snow shovels and snow blowers, a sad development for those who either wanted – or needed – to move lots of snow.

A spokesman for the Ace Hardware cooperative said most stores in the affected areas quickly sold out of snow-handling equipment, and poor road conditions kept delivery trucks from restocking. Gina Schaefer, co-owner of an Ace outlet in Washington, D.C., confirmed that report, saying people bought all the snow shovels she had the first day – then switched to garden spades.

Obviously, all of the impacted stores will have to be restocked, but most snow-shovel manufacturers are now based overseas, so opportunities to cash in from those orders will be well down the road – and will require investing in foreign companies, in most instances. (A number of small Chinese manufacturers of snow-handling equipment are listed on the Hong Kong Exchange.)

Plowing For Profits

Orders for new snow blowers and for such items as plow attachments for trucks, garden tractors and heavy equipment should also add to sales of some U.S. companies, though the markets for such equipment are dominated by large corporations with other major product lines, a prime example being Deere & Co. (NYSE: DE). That means the revenue impact and profit opportunity from the storms will be limited in this sector.

One company that could prove an exception is Briggs & Stratton Corp. (NYSE: BGG). Most of this firm's revenue normally comes from its lawn products, so the stock is now trading at "off-season" levels – priced at just $16.59 versus a 52-week high of $23.34. However, its Power Products Group LLC is the parent of Snapper, one of the leading makers of snow blowers and throwers, and its engines are used by a variety of other manufacturers. Briggs-powered snow products are marketed through home centers and mass merchants under such names as Brute, Craftsman, Ferris, Murray, Simplicity and Troy-Bilt, and the company should benefit from the expanded winter demand and restocking orders.

Government is a Loser – From the Winter Weather, That is

State and municipal governments are among the biggest losers from the wicked winter weather, with many having used up their entire annual budgets for snow clearance, road plowing, pothole repair and other weather-related maintenance in just a couple of weeks. Also gone in many locales are supplies of sand and rock salt used for battling icy roads, and that means new orders and increased revenue for suppliers.

The largest publicly traded specialist in de-icing products is Compass Minerals International Inc. (NYSE: CMP), which produces salt and magnesium chloride for use by road crews and operates a rock-salt mine in Goderich, Ontario. Compass Minerals' shares were trading at more than $75 a share late last week – close to its 52-week high of $75.71. That means that investors have already recognized some of the renewed demand – which the firm normally experiences in the fall. But the fact that more than half the country now needs to reorder could mean that there's plenty of upside left for investors who buy in now.

Both municipal and residential markets will also need plenty of pipe to replace the water mains and sewerage lines that froze and then burst in the bitter cold, or that were broken or crushed by snow-removal and road-repair efforts. That could be good news for Northwest Pipe Co. (Nasdaq: NWPX), one of the nation's largest makers of pipes for residential use and for municipal water and utility systems throughout the United States and Canada.

Since most of Northwest's usual sales are related to spring and summer construction projects, the stock price – at $24.77 – is near its yearly low. The upshot: Investors who get in now could benefit from both the unexpected winter-replacement needs and the normal seasonal upsurge in demand. 

Capitalizing on Grounded Profits

The final area of potential opportunity arising out of this unusual winter also falls into the wait-and-act-later column – or, if you're impatient, in the short-selling category.

A number of the nation's airlines took a major hit from the so-called "Snowmaggedon" – particularly those serving Washington, D.C., Baltimore, Philadelphia and other East Coast hubs. But the blizzards shut down air traffic even before they reached those publicized sites, closing airports in Albuquerque, Amarillo, Memphis, Nashville and many more en route.

In the first storm alone, Continental Airlines Inc. (NYSE: CAL) canceled nearly 1,000 flights. UAL Corp.'s United Airlines (Nasdaq: UAUA) pulled the plug on more than 600 excursions, and AMR Corp.'s (NYSE: AMR) American Airlines unit took more than 400 off the board – a number that multiplied last week when a one-day record one-foot snowfall closed down flight operations (and most of the rest of the area) at Dallas-Fort Worth International, AMR's home terminal.

So far, the markets have been distracted by other sectors and by the already weak condition of the airline industry, so they haven't yet punished the stocks for the lost revenue those cancellations represent. However, when actual numbers start coming out, they almost certainly will, so agile traders can either short those stocks now and cover later – or wait for the almost inevitable pullback and buy in then.
 
Although it also had upwards of 1,200 total cancellations in the three storms, the best ultimate "Buy" candidate in this group will likely be Southwest Airlines Co. (NYSE: LUV), since it's the only commercial air operation likely to show a profit this year in spite of the weather.

Two weeks ago, on Groundhog's Day at Gobbler's Knob Punxsutawney Phil forecast six more weeks of winter, so there's probably enough cold weather left on the calendar to create still more profit opportunities. However, the ideas here could provide at least a few hot profits to help take off the worst of the chill.

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