Doing something about the weather

Kiplinger's Personal Finance Magazine, Jan, 1998 by Ken Sheets

As director of global research for Nicholas-Applegate, the San Diego mutual fund company, Law Speidell deals with uncertainty: vagaries of primitive economies, international monetary cries, political coups and sectarian strife in Third World countries, not to mention the latest musings of Federal Reserve Board chairman Alan Greenspan. Lately, Speidell has a new worry: the weather.

El Nino, a massive pool of warm water in the pacific Ocean, is not only disrupting worldwide weather patterns, it is influencing investment decisions of professional money managers, commodity traders and even ordinary investors. "The impact of El Nino," declares Speidell, "is rippling throughout the world."

Take, for example, some of the stocks held by Nicholas-Applegate funds. Backus & Johnston, a Peruvian brewery, is reporting strong sales because of extremely hot, dry weather in southern Peru last winter (which is summer in the U.S.) that caused Peruvians to swig more beer. Northern Peru, meanwhile, was hit by torrential rains and floods. The government stepped up spending on public works projects to repair the damage. That boosted sales for Ferreyros, a Lima company that sells Caterpillar tractors, which translates into profits for Caterpillar (symbol CAT, New York Stock Exchange, recent price $46). Finally, Pliva, a Croatian drug company, anticipates a surge in sales of Zithromax, an antibiotic, because cool, wet weather is expected in the southern half of the U.S. this winter, creating ideal conditions for colds, flu and pneumonia. Zithromax, which costs $50 for a six-pill regimen and is sold in the U.S. by Pfizer (PFE, NYSE, $72), is effective against secondary infections resulting from those viruses.

El Nino's power to create winners and losers among industries and companies has professional money managers like Speidell searching for ways to take advantage of what some meteorologists predicted would be the "climate event of the century." And commodities brokers have used El Nino to entice ordinary investors, as exemplified by a recent Wall Street Journal ad for a discount commodities brokerage that offered a free "El Nino report" to investors interested in weather-related trades.

Don't believe all the hype. This El Nino may live up to its advance billing and become as powerful as the 1982-83 version blamed for $13 billion in damages and 2,000 deaths worldwide. But the investment implications of this El Nino are not as real as the hoopla would have you believe. Overall, says James O'Brien, a climatologist at Florida State University, "the appearance of an El Nino is good for the United States." What's more, the weather's impact on a company or industry is not always as great as it may appear.

Look at what's happening in Southern California. Alarmed by reports that the area would be hit by heavy rainstorms this winter, Los Angeles-area residents began putting new roofs on their homes at a frenetic pace last autumn. Roofing contractors recently claimed they had a 12-week backlog. Owens Coming (OWC, NYSE, $35), the nations largest roofing-material manufacturer, is operating its Compton, Cal., plant full bore and importing materials from plants in Dallas, Denver and Portland to double the local supply.

But the same weather pattern that is bringing heavy rain to Southern California suppressed hurricane activity in the Atlantic and Gulf of Mexico last summer. Hurricanes generate lots of business for roofing suppliers. As a result, Phil Fittante, West Coast manager of residential roofing products for Owens Corning, predicts sales for 1997 will rise about 3%, which is the normal rate of growth for the industry, despite the surge of business in Southern California. So while there may be good reasons to invest in Owens Corning, El Nino is not one of them.

Keep in mind, too, that El Nino is a short-term phenomenon, which typically lasts 18 months. Long-term investors should ignore it. But anyone thinking of buying and selling stocks in the coming months should factor in El Nino along with other considerations, such as industry fundamentals, earnings and the fiscal health of the company. With those caveats, here are some of the industries and companies that may be affected by El Nino this year.

NATURAL GAS

This industry offers a perfect example of how to play El Nino. There is nearly universal agreement that it will produce warmer weather this winter in the northern tier of states running from New England to the Rocky Mountains, normally the coldest part of the U.S. That will dampen the demand for natural gas during the peak heating season.

Analyst Ronald Barone of Paine-Webber notes that residential use makes up 32% of total natural-gas consumption in the U.S., and that 70% of that consumption occurs on November through March. He estimates that El Nino could pare 10% off the average heating cost for consumers this winter. That gives homeowners and businesses a break, but it hurts earnings of natural-gas exploration companies and local utilities.