By Jim Roemer and Jeff Wang
Whether we like it or not, changes of climate usually have an effect on our society. The change of climate will affect the way people live, work, and think. For example, the rainy weather in Vancouver, Canada makes raincoats and umbrellas the most visible fashion in town; while in Miami, Florida, bikinis and surfboards make the major scheme. Just by using common sense, we can identify such industries as energy (heating oil and natural gas), apparel, car batteries, and snowblowers whose stock prices are likely to benefit from the cold weather.
The main elements we will be looking for in a company to recommend a "buy signal" are listed below. There may even be some situations when a "short sell" of a company will be warranted.
The projected growth of a company depends on many factors, but the following are the indicators we will use the most often:
1) Weather: For some stocks, weather can make a big difference in a company's earnings. We want to concentrate our efforts in recommending stock trades based on weather patterns.
2) Political environment: Whether the government is stable, and whether the currency of a country is stable; if a country is at war, chances are that only the defense-related companies can grow.
3) Interest rates: The lower the rates the better for company business. This is because the company can borrow more money for less cost with lower interest rates, and use the money to expand their business.
4) Management of the company: It is very hard for small investors and outsiders to evaluate the management of a company. If you follow the stock for several months, you may be able to make an evaluation. For example, if a small growth company has not had a new product for six months, it may run out of steam. If the President of a company accumulates the stock heavily, the stock may be undervalued. Investors can also scrutinize the quarterly earning reports to spot trouble or potential opportunities.
5) Psychology: There are mass perceptions of a stock at every stage of its growth. The huge move in internet stocks recently is a perfect example of traders catching a bandwagon ride of "perception" without any real evidence of solid corporate earnings.
To do technical analysis requires study of the market psychology. The most frequently-used techniques are the following:
1) Trendline: "Trend is your friend." If the market environment is good, a stock in an uptrend outperforms the stock in a downtrend the majority of the time;
2) Moving averages: Moving averages can tell us the short term, middle term, and long term trend of a stock;
3) Price chart pattern formation: A good looking chart does not guarantee the growth rate of a company. It only makes sense when the chart pattern can tell the story of a company's fundamentals.
4) Call/put ratios: This is a ratio of the number of people who are bullish about a stock versus the number of people who are bearish about a stock. Since stock option players are mostly market speculators, call/put ratio is a good indicator for mass psychology.
During the cold winter of 1979, the natural gas/pipeline group jumped 120% in 3 months! (Figure #1) The stock of Enron Corp., an integrated oil and natural gas company, was up 200% from the third quarter of 1978 to the second quarter in 1980. The reason is PROFITS.
When winters are cold, more people will use natural gas to warm their houses and offices; therefore generating a huge volume of usage. The more natural gas people use, the more profit the companies supplying the gas earn. Natural gas and oil drilling companies may do especially well during cold winters, as the rise in cash heating oil and gas prices generates a high profit with little corresponding increase in a company's expense ratios. Utility companies that must buy their coal, nuclear power or natural gas to generate electricity will see their expenses climb during cold winters. However, these expenses
will be offset by the higher prices consumers must pay for electricity. If a company is well run, profits will be realized during periods of hot summers and cold winters. Among the natural gas stocks, El Paso Natural Gas Company (Ticker EPG, NYSE) and Enron Corp. (Ticker ENE, NYSE) will have great potential price appreciation if this winter is cold.
Natural gas companies benefit from the cold weather by bigger demand for and tighter supply of the natural gas. A report released by AGA in late November showed that the working gas storage was 97% full at this time last year, and is presently 87% full. This will increase the demand and production of the natural gas companies. In addition, interest rates should remain the same or lower which will also be bullish.
El Paso Natural Gas Company owns and operates a mainline natural gas transmission and gathering system that supplies natural gas to Oklahoma, Colorado, California, Texas, Nevada, Arizona and northern Mexico. Last year, the net earnings decreased 6% to $62.5M. Lower natural gas sales, a reduction in gas rates and increased interest on short term debt resulted in a lower stock price. EPG on Friday, 11/24/95, at $31.375 with a PE ratio of 12.8. Earlier in the week, the stock broke out of a long term down trend on news of increasing demand for natural gas from both the U.S. and Mexico. This represents the supply-and-demand picture of the U.S. natural gas market and the desire of the Mexican government to increase usage of natural gas.
ENE engages in natural gas exploration, development and production, natural gas liquids processing, and the transportation and marketing of natural gas. For the six months ending 6/95, revenues rose 2% to $4.45B. Net income rose 17% to $281.4M. Revenues reflect gains on sales of reserves and related assets that totaled $59M vs. $19M. Earnings also reflect lower depreciation, depletion and amortization expenses. The stock traded on Friday, 11/24/95, at $36.25 for a PE of 18.25. ENE is an integrated oil and gas producer. The company had an agreement to drill in India this summer but this was revoked by the local government. This caused the stock price to drop. The outlook of a cold winter will certainly help the stock to break through technical resistance to reach new highs.
Exide Corporation manufactures and markets starting, lighting and ignition lead acid batteries primarily for automobiles and commercial applications. This is THE car battery company in the U.S. They produce Exide, Sears Die Hard, and some of the NAPA batteries. Recently, the company expanded its European market via recent acquisition of Compagnie Europeene d' Accumulateurs S.A. and Sociedad Espanola del Acumulador Tudor S.A. The stock (EX) traded on Friday, 11/24/95, at $45.50. Exide would be the biggest beneficiary in the automobile industry in a cold winter. The company bought into the European market recently and reorganized some of the plants. This turned out to be a good move since the European countries are expected to have colder weather over the next couple of winters.
Click here for larger price chart of Exide Corp.
Earlier in 1995, a mild January-March over much of Europe, the Midwest and Northeast hurt sales of car batteries. The percent change in Earnings Per Share (EPS) dropped by as much as 20% in the first quarter his year. The price of Exide Battery also fell late last winter and during the early spring. Expect prices to move higher in 1996 if our forecast is correct.
Asked how he can improve business this year, the chairman of Burlington Coat Factory, Monroe Milstein, said: "Look, give me a decent winter." The apparel manufacturer has 35% of their business in outerwear making the stock more sensitive to winter weather. For the 12 months ending July 1, 1995, Burlington Coat Factory earned $14.9 million, or 37 cents a share, down from the $45.4 million, or $1.12 a share earned during fiscal year 1994. The direct cause of this was the warmer than usual winter of 1994-95. The stock (BCF) dropped 67% from as high as $27 to as low as $9.
Burlington Coat Factory operates a chain of 240 off-price apparel stores.These offer a broad range of moderate to higher priced, current brand name merchandise for men and women at prices below traditional retail prices. Net income in 1995 fell 67% to $14.9M despite an increase in gross sales. Revenues reflect higher sales from New Burlington Coat Factory stores.
Earnings suffered from lower margins, increased markdowns, and higher interest expenses. The stock traded on Friday, 11/24/95, at $12.25 with a fairly high PE of 43.7. The stock broke out of a middle term downtrend because of positive comments from Barron's. Though the cold weather will help coat sales,the lack of fashion in the industry has a negative effect on consumer spending. Recent reports showed that people are expecting more and willing to pay less. This forced across the board markdowns in the apparel industry which may significantly hurt the profit margins of BCF again.