By Chris Versace
Editor, PowerTrend Profits
You may have watched Sunday’s Super Bowl, or at least participated in a Super Bowl party. If you live in the Midwest or Northeast, you probably watched the game with one eye, while the other one was on a smartphone or tablet tracking winter storm Linus, which was expected to drop a foot of snow on Chicago before reaching the Northeast. On Linus’ heels, a rash of arctic cold is slated to follow that will drop temperatures and have people turning up their thermostats. That winter combination follows the much-hyped no-show snowstorm Juno last week which underwhelmed but still dropped several inches of snow in the Northeast.
Even though the Patriots won the Super Bowl, ask anyone from Boston, and they’ll tell you about all the snow and related flight and train disruptions. In fact, on my way to teach my graduate students at New Jersey City University earlier this week, I ran into several folks who had their flights into Boston cancelled because of Linus.
Subscribers to PowerTrend Profits know full well my view on situations like this and others. Pain points, be they short or longer term in duration, represent great investments if you identify those poised to profit from the pain. With an eye on the winter storms and ensuing arctic cold, here’s a look at some potential winners and victims.
As my weekly travels pointed out above, one industry that will get hit hard will be the airlines, particularly those with heavy exposure out of the New York, the tri-state region and New England. I can vouch for the airline disruption firsthand, because last week United Continental (UAL) scuttled my flight from Newark to California. Already, airlines have grounded more than 1,200 flights through Monday, according to flight-tracking service FlightAware. As the storm progresses, odds are high that this figure will be revised higher. That eventual total will add to the more than 6,000 flights that were cancelled last week. Airlines with major hubs in the combined path of these two storms are United, Delta Air Lines (DAL), which has meaningful exposure to the impacted areas, as well as Jet Blue (JBLU) and American Airlines (AAL). While they are benefitting from lower fuel costs, cancellations tend to wreak havoc on an airline’s revenue.
On the beneficiary side, there are the logical players: Home Depot (HD) and Lowe’s (LOW), as consumers look for shovels and snow blowers. Speaking of snow blowers, Toro (TTC) should benefit from the storm, as should Compass Minerals (CMP), a company that sells salts to help de-ice highways, streets and sidewalks. Last year, we saw generator companies like Generac (GNRC) perform well during the frequent snowstorms we saw in 1Q 2014. If we see more snowstorms of similar size, Generac could be a stock to look at.
A category of companies that should see some pickup in demand, particularly as the arctic cold follows on Linus’ heels, is utilities as people crank up the heat to stay warm. From Chicago to the New York tri-state region, that means shares of Exelon Corp. (EXC), which owns Chicago-based ComEdison and Philadelphia’s PECO, as well as Con Edison (ED). I prefer the more diversified play that is the Utilities SPD (XLU). While there has been much talk about natural gas production, the recent storms and the arctic temperatures are great for goosing natural-gas demand, at least from a psychological perspective, if not a fundamental one. That means shares of United States Natural Gas Fund (UNG) could be a quick trade this week.
Profit Big From Short Pain Points with Options
When a pain point tends to be shorter in duration, like the disruption from a winter storm, usually there is a quick and emotional reaction that boils over into the company stocks that are likely beneficiaries and victims. While those few points can make for nice returns, I find the better way to maximize returns is to take advantage of the inherent leverage associated with options. The strategy is to trade call options on those pain point beneficiaries and, for those who are more risk tolerant, put options on pain point victims.
Trading both a call option contract and a put option contract tied to the same event is part of what’s called a pair trade. In a perfect world, you make money on both sides of the pair trade, but if something goes wrong, the most you can lose is the total value of the two options contracts. Limited losses and leverage to the upside are some of the factors that have investors flocking to options and leaving stocks and even exchange-traded funds (ETFs) behind.
I suspect that you might be interested, but you’re wondering how pairing PowerTrend investing with options has performed. Subscribers to my PowerOptions Trader service finished 2014 with an average gain on closed options trades of 36%. You can learn how I did that, and what’s next, here.
In case you missed it, I encourage you to read my e-letter column from last week about how the strong dollar and earnings are affecting the market.