How to profit from the cold snap

Ian Cowie consults investment experts on the best companies to benefit from frozen Britain.

Published: 7:18AM GMT 14 Jan 2010
Extreme weather has inconvenienced millions of people in recent weeks, but some investors argue it's an ill wind that blows no good.
They predict there will be winners as well as losers when the financial effects of this winter are weighed up.

City cynics claim the smart money has been piling into companies that will benefit from a cold snap ever since last month's international conference on global warming.
But others say there is further to go. For example, gas and electricity providers' share prices were largely left behind by last year's stock market rally.
These firms are paying much higher dividends than more fashionable sectors which could prove more vulnerable to setbacks in 2010. Whatever happens to the economy and discretionary consumer spending, people are likely to want to continue heating their homes and cooking their food.
While it would be wrong to overstate the long-term impact on profits of a few weeks' freezing conditions, Your Money asked a selection of financial advisers to pick stocks that might benefit from a re-rating prompted by bad weather.
Keith Bowman of Hargreaves Lansdown wealth managers said: "National Grid is situated at the heart of Britain's electricity and gas network and is one of the biggest energy companies in the world.
"The company also owns and operates the high-pressure gas transmission system in Britain, with this distribution business delivering gas to 11 million homes and businesses.
"It also distributes electricity to nearly five million customers in Massachusetts, New Hampshire, New York and Rhode Island. In addition to its transmission and distribution business, the company also operates a number of related businesses including liquefied natural gas (LNG) importation and storage, metering, interconnectors and land remediation."
National Grid was trading around 647p this week, compared to a 52-week high of 682p, and yielding 5.6pc net of basic rate tax with the dividend covered 1.4 times by earnings.
Mr Bowman also favours BP. He said: "British Petroleum is a major global oil and energy provider. The group is currently the UK's second biggest company by market capitalisation – HSBC is number one – with a stock market value of over £115 bn. BP employs over 90,000 people globally, conducting exploration and production operations in over 25 countries worldwide.
"The group's third-quarter results last October saw the company comfortably exceeding analysts' forecasts. While the global economic downturn continued to impact, an improved operational performance combined with additional cost savings helped to cushion the fall.
"Furthermore, a perceived recovery in the global economy, aided by the current cold snap impacting on much of the northern hemisphere, has recently seen energy prices rising, a fact that should assist the group going forward."
BP was trading near its annual high of about 633p this week, yielding 5.4pc net, with dividends covered two times by earnings.
Peter Day, a partner at stockbrokers Killik & Co, said: "While the recent cold snap is bad news for companies such as retailers where they may see reduced footfall, this is not necessarily the case for all. Specifically, we would highlight the utility companies, which have lagged the market rebound over the course of the last nine months.
"As uncertainties resurface in the economy, investors should look towards the certainty of the utility sector where investors can benefit from a defensive earnings stream and attractive dividend yields. We believe that interest rates are going to remain lower for longer than many forecasters predict and this high level of dividend income may become increasingly attractive.
"Centrica secures and supplies gas and electricity to residential and business customers throughout the UK. These activities account for 90pc of group profits, but it also has operations in North America and Continental Europe.
"In the UK, the company, operating as British Gas, is the biggest retail energy supplier, with a 44pc share in gas and 22pc share in electricity. There are some concerns surrounding the health of the competition in the UK retail business, potentially leaving Centrica well placed to take market share and improve profit margins over time.
"The group has also made strong progress with its other strategic priorities – improved customer service and cost cutting.
"Despite the increased level of acquisition activity, the balance sheet remains robust, with net debt of £2.5bn. As a result, the group has firepower for further acquisitions and the flexibility to pay an attractive yield. We believe the current level provides an excellent long-term opportunity to buy a well-managed company with a strong brand, high market share and scope to add shareholder value."
Centrica was trading around 279p this week, yielding 4.4pc, with dividends covered 1.4 times by earnings.
Even as fears recede that swine flu would cause massive casualties, winter and its associated illnesses may prompt a reassessment of the defensive attractions of pharmaceutical stocks.
Mr Day said: "GlaxoSmithKline is a global pharmaceutical and consumer health-care company with a broad-based drug portfolio in central nervous system, respiratory, vaccines, oncology and anti-viral markets.
''The group is less exposed to patent expiries than most of the peer group, with only 25pc of its sales vulnerable to generic competition between now and 2012. Its cost-reduction programme has already delivered £1 bn of cumulative annualised savings and the group is still targeting £1.7 bn of savings by 2011.
''The company is financially strong and management has postponed the share buyback programme to focus on acquisition opportunities provided by the market downturn.
"However, the group has dismissed the prospect of a large-scale merger and will instead focus on smaller deals, with the emphasis likely to be placed on vaccines, over-the-counter medicines, consumer health care and expansion in emerging markets."
GlaxoSmithKline was trading around 1290p this week, yielding 4.7pc, with the dividend covered 1.9 times by earnings.
George Godber from Matterley Asset Management – part of Charles Stanley – picked some smaller companies. He said: "Nationwide Accident Repair Services have a network of accident and repair centres across the UK, we know both the RAC and AA have reported in the past two weeks that they have seen some of their busiest call times ever.
"National Accident Repair Services has net cash on the balance sheet and trades on a relatively lowly eight times earnings per share, with 5.4pc dividend yield.
"Alternatively, there is Domino's Pizza. During last year's heavy snow fall we saw its like-for-like sales jump. As a nation, it seems when the weather is bad we would prefer to stay inside and order the food in. Domino's trades on 21 times earnings, with a 2pc dividend yield.
"Finally, another winner from bad weather could be Providence Resources. Unfortunately in the UK and in Ireland we have hugely underinvested in our gas-storage capabilities. We are actually in breach of European Union directives that state we should be storing three months' of supply. On average we store just 14 days' usage in the UK compared with over 80 days' in France and Germany.
"For many years, Britain seemed to have an endless supply from the North Sea, but this has now come to an end. The prospects of a higher and more volatile gas price should lead the Government to readdress this balance. One of the companies best positioned for this is Providence Resources which owns the depleted gas fields off southern Ireland, at Kinsale Head, that could be linked to both Ireland and the UK."
Charlotte Black, of Brewin Dolphin's investment banking division, also favoured candidates outside the FTSE 100 blue chips. She said: "Telecom Plus is a supplier of utilities that is well placed to benefit from increased energy consumption that will come through during this cold period.
"Around 70pc of energy consumption typically occurs in the second half of Telecom Plus's financial year which, coupled with strong increases in customer numbers and high energy demand, should provide a favourable backdrop for the run up to the March year end.
"Alternatively, the performance of BBA Aviation's de-icing operations at US airports has the potential to mean the difference between hitting forecasts or falling short. With the US east coast also experiencing extremely low prevailing temperatures pre and post-New Year, this should have boosted December year-end results and provided positive momentum into 2010.
John Haynes, head of research at Rensburg Sheppards, said basing selection on the current weather patterns is not where he would start when considering shares to invest in. But, among less obvious candidates, it may be worth considering general insurance companies such as Aviva and RSA.
"Both have UK and European exposure. Although claim expenses are likely to rise, since both road accidents will increase as will home insurance claims as burst pipes cause damage as the thaw sets in, the consequences should be that premium rates firm as the uninsured realise the error of their ways."
Other options to diminish risk by diversification are to buy exchange traded funds (ETFs) or exchange traded commodities (ETCs) from a stockbroker or wealth manager.
These are the ways to play the weather favoured by Justin Urquhart Stewart, of Seven Investment Management. He said: "Economic dislocation from the freeze will ripple across the economy, but the utilities has to be a great place to start – not just in the UK but across the continent; follow the snow line.
"The iShares DJ STOXX 600 Utilities (SX6PEX GY) is the most obvious one, giving exposure to a broad array of European utilities, including power generation. You might also consider iShares DJ STOXX 600 Oil and Gas (SXEPEX GY). Both are listed in Germany, but db x-trackers has similar London-listed, swap-based ETFs.
"If you think there will be fuel shortages you could try ETFS Heating Oil (HEAT LN) or ETFS Leveraged Heating Oil (LHEO LN) and also ETFS Short Heating Oil (SHEA LN) if you are bearish.
"I am told that if the temperature in Eastern and Central Europe persists at a very low level some of the winter wheat crop will be damaged – an adventurous investor could sell short the ETFS Wheat (WEAT LN)."
However, a substantial disadvantage of ETFs in the high-yielding utilities sector is that while dividends are added to the value of the fund, they are not distributed as income. While commodities themselves pay no income, storage costs contribute to the total expense ratio of ETCs; although these costs are usually only about 0.5pc per annum.