As the El Niño weather phenomenon makes the U.S. Northeast warmer, the Midwest drier, and the South and the West wetter this winter, Eric Marshall, portfolio manager of the $2 billion Hodges Small Cap fund, is not one of those people who just talks about the weather. He's doing something about it.
"We are trying to pinpoint companies that should see something more than temporary disruptions that will only last one quarter," said Marshall, who runs the $2 billion Hodges Small Cap fund in Dallas. His fund sold its position in ski resort operator IntraWest Resort Holdings Inc in part because of expectations of lower than normal snowfall at some of its properties, including Stratton in Vermont, Snowshoe in West Virginia, Tremblant in Quebec and Blue Mountain in Ontario.
With the warm weather in the United States contributing to a selloff in oil that's pushed prices down to 2009 lows, El Niño's effects are rippling beyond traditional crops and mining interests to boost business for insect control companies, dine-at-home services and roofing specialists.
Already, 23 U.S. companies are expecting a hit - good or bad - from El Niño, ranging from GrubHub restaurant delivery service to auto parts supplier O'Reilly Automotive, according to a review of transcripts of earnings calls by Reuters. For example, bug killer Orkin, owned by Rollins Inc, has already forecast more mosquitoes, ants and flies on the way for the United States. "Warmer, wetter conditions favor pest activity," said Ron Harrison, director of technical services for Orkin.
"If the experts are right about El Niño, the pest control industry will benefit, no doubt about that," said Jamie Clement, senior analyst for industrials at Macquarie Capital. GrubHub, which says it does business in more than 900 US cities and London, is salivating at the prospect of rainy nights keeping diners at home. "Fifty degrees and rain is better for us, frankly, than 35 degrees and sunny," Chief Executive Officer Matt Maloney told analysts last month on an earnings call.
The conventional wisdom for betting on El Niño has favored going long grain prices - as droughts menace big producers like Australia and India - and base metals, where flooding in South America can disrupt mining. During the last major El Niño in 1997-98, heavy rains and flooding led to thousands of deaths, loss of crops and extensive damage to infrastructure in Ecuador, Peru and Bolivia, while in Indonesia and Malaysia, drought hit palm oil production and pushed prices higher, according to a report by Schroders.
The latest cycle is now expected to become one of the strongest on record, the U.N.'s weather agency said last month, adding its effect could be compounded by climate change. Areas that experience a milder winter could generate lower reveanues for auto parts supplier O'Reilly Automotive, as car batteries will survive better. "Extreme weather is generally good for us," O'Reilly said on a call with analysts.
In the northern United States, fewer snow storms should be good news for commercial insurers because claims for damages to roofs or pipes or for household leaks should all be down. But less snow could encourage more driving and bump up accidents. "The conditions are ripe for commercial insurers to see lower losses related to winter storms, but higher losses for auto insurers because there will be more people on the roads," said Rob Haines, senior insurance analyst at CreditSights.
To be sure, El Niño has very different effects depending on geography and, like most weather patterns, is still hard to forecast with certainty. It defied expectations and did not show up in 2014 -- which was, nevertheless, the hottest year on record. And this time around, the world has massive stocks of grains after several years of bumper harvests and no shortage of base metals -- partly due to slowing growth in China and new supplies coming to the market.
"So far, the current El Niño episode hasn't generated big moves in agricultural goods prices," according to a research report from the Chicago Mercantile Exchange (CME), the world's biggest grain futures market, published on Nov. 18. The United States and Canada had large harvests of corn, soy and wheat while Argentina and Brazil have had bumper harvests of soy and wheat.