Five stocks that will rise with falling temperatures

 

Inconceivable as it would have seemed just weeks ago, it looks like it is going to be a cold winter. On the east coast, a record-breaking late year heat wave has finally given way before a severe winter’s chill, while the West Coast, which was already experiencing record cold, has had no relief. If forecasters are correct, the coming days will see temperatures fall even further, as arctic blasts simultaneously strike both the US and Europe. As for the coming months, a strong El-Nino is expected to keep temperatures on the cool side of average.

In the past few years, numerous companies have blamed cold and/or snowy winters for unexpected earnings shortfalls, (even in cases when the winters were not especially cold or snowy) but investors need not despair. As is often the case, there is another side to this story. Historically, some companies thrive in the cold. Others have remained unharmed by the cold, while their competitors have suffered. Either way is good news for stock owners.

Prescient investors would do well to act quickly, while the memory of a 72 degree Christmas Eve is still preventing a lot of Wall Street money from acting on the new reality. That reality again: it’s really cold. Remember to take these ideas as just that, ideas, and do your own research before investing.

Starbucks (SBUX)

The winter months have traditionally been a boon for Starbucks, and while the east coast’s warm December was not ideal, this should be more than made up for by the now frigid East, frigid Europe, and ever-frigid West. Those concerned about stock market jitters should also take note that SBUX stock has traditionally been somewhat resistant to stock market downturns.

The stock is about five percent off its October high, which is not a lot, but it is not bad for a stock that has done well in the past even for those who have bought into it while it is at an all-time high. I wouldn’t expect more than 15% out of this stock in the next twelve to 18 months, but given its stability, that’s an excellent risk/reward ratio.

SBUX

Chipotle (CMG)

It’s like you can’t poison anyone nowadays without the whole world throwing a fit. OK – seriously, Chipotle’s overall record on health is pretty good, especially compared to the rest of its industry. At present, we are seeing new headlines on almost daily basis connecting the company to e-coli and norovirus, as well as downgrades, criminal probes, and possible shareholder lawsuits. The word hysteria comes to mind, and hysteria is ever the friend of the contrarian investor.

This is the proverbial “blood in the streets” moment for Chipotle, and brave investors could make a killing off the stock when the current headlines blow ever, and everyone realizes once again that the food is still as good as ever.

Oh – it seems almost beside the point, but Chipotle continued to expand its revenue in the snowy winter of 2013-2014 when many of its rivals, particularly McDonalds, experienced revenue shortfalls. Given the current crisis, investors should see this as one more sign of the loyalty many consumers still feel for the chain. CMG is priced around $425 per share. It has been more than two years since the last time it could be picked up so cheap. So consider this a test – just how contrarian an investor are you?

Valero (VLO)

If the glut of oil continues to get worse, drillers will soon be paying refiners to haul it away for them. Even dismissing that far-fetched scenario, the abundance of cheap, clean American oil is a huge boon for independent refiners. Note that for refiners, oil is not a product, but a raw material. They make their money by turning oil into all different grades of fuel, as well as raw materials for the chemical industry.

The majority of refining is done by the major oil companies, and this profitable aspect of their business is the reason that the big companies haven’t suffered nearly as badly as independent drillers. Follow the logic a bit further, and you can see the attraction of owning an independent refiner.

It’s a common consumer complaint that the price of gasoline takes days or weeks to fall far enough to reflect a drop in the price of oil, but that it rebounds almost instantly when the price of oil rises. Somebody is clearly getting rich off this, and that somebody is refiners. Buy stock in an independent refiner, and that somebody might be you.

Of the independent refiners, Valero looks to be the best value with a PEG Ratio of just 0.7. VLO stock hasn’t pulled back as the other independent refining stocks have, but it still looks cheap. There’s really no telling how much upside there could be in this stock over the next two, five, or ten years.

Marathon (MAR)

I’m adding a second refining company to the list, as refining truly seems to be an incredible industry to be in at the moment. Fate has conspired to hand refiners dirt-cheap raw materials, while the very same issue has seriously impinged on the liquidity of the big five oil companies, making it nearly impossible for them to threaten existing refining interests by expanding their own.

So while the current cold snap hasn’t snapped the broader energy sector’s run of bad luck, it should be enough re-kindle good times for independent refiners.

As with Valero,  Marathon looks good from a value perspective – its PEG Ratio is 0.94. A third company, Phillips 66 (PSX) is generally grouped with these two, but PSX shares, with a PEG Ratio of 1.44, currently appear far more expensive.

Arctic Cat (ACAT)

This maker of snowmobiles has stumbled in recent quarters, and not all of its woes can be blamed on warm temperatures. Still, Arctic Cat now has a real opportunity to turn itself around, thanks not only to the cold weather, but also the even more stumbling of its far larger competitor, Polaris Industries (PII). In December, Polaris lowered its guidance for 2015 and 2016 earnings, and also recalled 5,000 vehicles due to safety concerns.

Arctic Cat is down more than 50% over the last year, but it has done well in the past when Polaris stumbled, particularly following the financial crisis of 2008. This is a risky play to be sure – but possibly a double or triple if things do work out.

Symbols: CMG MAR SBUX VLO
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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