Despite the Heat, It’s Time to Pursue Cold Weather Profits

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 |  Includes: AVP, CMP, COLM, CPB, DBA, JO, JVA, NIB, PEET, TBL, TSCO
by: Money Morning

By Larry D. Spears

Take our word for it: Even though much of the nation has experienced record high temperatures this month, it'll be plenty chilly before you know it - and if you want some hot profits to warm you up come January, you'd be smart to think "winter" in August.

No, we haven't been sneaking refreshments from a St. Bernard's K9 cask: The reality is that a lot of companies that specialize in cold-weather products are stuck in the summer doldrums right now, meaning their share prices are in the cellar. But, when rising winter demand ramps up their sales and profits, those stock prices will likely march higher, right along with your monthly heating bills.

Cold-Weather Coffee Plays

Not all companies that see increased business in the winter are energy-related, though a number of them do deal in black liquids - but the kind that comes in cups rather than barrels. The product, of course, is coffee, which prompts most people to think Starbucks Corp. (NASDAQ:SBUX), recent price: $24.50. However, the coffee sector includes lots of attractive alternatives, including two individual companies, a pure-play exchange-traded note (ETN) and a diversified exchange-traded fund (ETF) laced with a strong shot of java:

  • Coffee Holding Co. Inc. (NASDAQ:JVA), recent price: $4.70: This New York-based wholesale coffee roaster and dealer is appealing because you can buy a share of the stock for roughly what a Venti Mocha Latte costs at SBUX. The stock is in the middle of its annual trading range, had earnings per share of 71 cents over the past 12 months, equating to a Price/Earnings (P/E) ratio of just 6.62, and even pays a 12-cent dividend, giving the stock a yield of 2.5%.
  • Peet's Coffee & Tea Inc. (NASDAQ:PEET), recent price: $35.30: This California-based company roasts and markets whole bean coffee throughout the United States, with many locations sited in grocery stores and malls, rather than standing alone. With a market cap of $461.6 million and earnings of $1.47 per share, PEET ranks as one of coffee's "Big Three," but offers far more potential than Starbucks at this point.
  • Barclays iPath DJ-UBS Coffee ETN. (NYSEARCA:JO), recent price: $48.40: This ETF tries to mirror the returns provided by unleveraged investment in coffee futures contracts, augmented by interest earned on collateral invested in specific U.S. Treasury bills.
  • PowerShares DB Agriculture Fund. (NYSEARCA:DBA), recent price: $26.10: This fund seeks to track the performance of the Deutsche Bank AG (NYSE:DB) Liquid Commodity Index, which is a basket of the most liquid and widely traded agricultural products, including corn, wheat, soybeans, coffee and sugar.

If coffee's too strong for your tastes, you can also opt for a nice warm cocoa ETN with a dollop of profit potential - or even a hot cup of soup:

  • Barclay PLC iPath DJ-UBS Cocoa ETN (NYSEARCA:NIB), recent price: $41.60: Tracks the performance provided by unleveraged investment in NYMEX cocoa futures contracts, with returns augmented by interest earned on cash collateral invested in U.S. Treasury bills. Cocoa now goes for around $2,890 a metric ton, well below last winter's highs of $3,350.
  • Campbell Soup Co. (NYSE:CPB), recent price, $36.90: The king of the world soup market, Campbell Soup distributes product throughout the Americas, Europe and the Asia-Pacific region, generating $7.9 billion in revenue over the past year. The company has a market cap of $12.53 billion, earnings per share (EPS) of $2.30 and pays a dividend of $1.10 (a 3.0% yield).

Ride High on Retailing

There are also a number of retail companies that usually tend to roll up higher sales and profit numbers during the winter. Some include:

  • Columbia Sportswear Co. (NASDAQ:COLM), recent price: $49.30: This Oregon-based company designs and sells outdoor apparel, including winter outerwear, sportswear and footwear. The company earned $2.02 a share. The shares are trading at a P/E of 24.10 and pay a 72-cent dividend, for a yield of 1.4%.
  • The Timberland Co. (NYSE:TBL), recent price: $17.93: A maker of snow boots and their rugged footwear, Timberland traded near $25 last January, having risen from just above $12 last fall - the kind of move this story's premise is based on. Persistent talk of a potential takeover by Nike Inc. (NIKE) also helps support the stock. The trailing 12-month earnings per share were $1.13 and the stock features a P/E of 15.85; no dividend.
  • Tractor Supply Co. (NASDAQ:TSCO), recent price: $70.33: Most people think of Home Depot (NYSE:HD) or Lowe's Companies (NYSE:LOW) when shopping for winter tools, equipment and supplies, but Tractor Supply sells the same stuff - plus lots of items to help livestock and pets beat the weather. It operates more than 930 stores in 44 states, and last year's sales sent the stock from $44 in October to $60 in February. The stock may not do as well this year, though, since it hasn't given back any of those gains.
  • Avon Products Inc. (NYSE:AVP), recent price: $29.85: This might seem like a strange pick, but winter can wreak havoc on facial skin and hands, sucking moisture from the air and drying the delicate tissue. Avon products - including the high-margin Burt's Bees line, which it bought a couple of years back - restore the skin quite well and enjoy winter sales jumps as a result.

The only problem with the retail sector is that last year's success may dampen this year's prospects. Dr. Kent Moors, editor of Oil & Energy Investor newsletter and a frequent contributor to Money Morning, cautions that factors other than routine home-heating demand play a major role in setting prices. As Dr. Moors pointed out: "I bought a new snow plow, stocked up on salt and got another parka during the winter of '09-10, so I don't need anything this year."

One area where last year's purchases didn't carry forward is in road maintenance. City, county and state highway departments had winter-related supplies almost entirely depleted by last year's demands, so they're heavily re-stocking such items as road salt and de-icing chemicals, which is good for the leader in this sector:

  • Compass Minerals International Inc. (NYSE:CMP), recent price $73.30: Compass produces salt and magnesium chloride for use by road crews. It also operates a rock-salt mine in Goderich, Ontario. The stock hit $82.65 last spring before demand eased off, taking the price down. But, if forecasts worsen, that trend could reverse just as quickly this fall.

Of course, not every fund or company that specializes in cold-weather products or services will move toward higher ground as temperatures drop - but a lot of them will. That makes the notion of doing some winter-oriented bargain hunting worth pursuing while it's still sizzling. Be aware, however, that this article covers a lot of ground and the prospects mentioned are just ideas, not recommendations. Space limitations also prevented including a lot of supporting data, so thoroughly check out the numbers for any of them before you actually invest.

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