El Nino Is Coming: Are You Prepared?

There's a high chance that 2014 will welcome an El Niño with wide-ranging effects.

May 16, 2014 at 7:33PM

El Nino, the periodic phenomenon of unusually warm Pacific Ocean surface temperatures, carries a lot more mystique than the average shift in weather. This is because it can seriously disrupt global weather and thus impact many industries. Drought in Australia, Asia, and West Africa can hurt crop production, while excessive rain can hurt South American agriculture. The side effects of a warmer Pacific could also severely damage fish populations, reduce Atlantic hurricanes, and increase the price of nickel.

There are plenty of other businesses that face changing fortunes amid a 65%-plus chance that El Nino will occur this summer. Can you profit from the change in weather?


Typical El Nino weather variations. Source: NOAA.

Food providers and producers
If commodity prices increase, then both consumers and consumer-focused companies will have to absorb higher prices. Coffee, most of which is produced in South America, could particularly be affected by El Nino. Would a bet against coffee companies pay off?

Probably not. It's a well-prepared industry, as Starbucks (NASDAQ:SBUX) and other coffee-dependent companies buy coffee far in advance. Starbucks has already almost completely met its coffee needs for 2014 and has covered 40% of its needs for 2015. And El Nino typically only lasts between nine and 12 months, though in the past it has persisted for up to four years. In addition, Starbucks' operating margin was a comfortable 16.6% last quarter, giving the company plenty of buffer from any shock to coffee costs -- especially since that product represents less than 10% of its total operating costs.

During the El Nino of 1997, there were only three Atlantic hurricanes, while the devastating 1998 hurricane season saw 10 and occurred during a La Nina (an unusually cold Pacific Ocean). In fact, during an El Nino, the probability of two hurricanes making landfall in the U.S. is only 28%, versus a neutral year's 48% and a La Nina year's 66% odds. Similarly, the odds that a storm will cause over $1 billion in damages during an El Nino, neutral year, or La Nina is 32%, 48%, or 77%, respectively.

A weak hurricane season like last year's could give insurers a boost via fewer catastrophic losses. Travelers (NYSE:TRV), for example, incurred about $500 million in hurricane and tropical-storm losses in 2011, but over $1 billion in 2012 due to Hurricane Sandy. With fewer claims and expenses in 2013, net income increased to $3.6 billion -- well more than the $2.4 billion earned in 2012 and $1.4 billion in 2011.

It is not known if a weak hurricane season is priced into insurers' stock prices. However, any bet on weak hurricanes should be tempered with the possibility of flooding elsewhere -- and the fact that catastrophic storms can still hit no matter the temperature of the Pacific.

The chance to profit is slim
Due to the erratic nature of the weather, any financial bet would be speculative, rather than a true investment. Also, many industries are already intimately aware of the challenges weather can present and have hedged against trouble. Additionally, due to El Nino's typically short duration, any bet on the weather would lack the benefits of long-term investing.

If anything, a company that hedges well and manages risks like El Nino might indicate solid management and a company worthy of further research.

In fact, you can read about a few energy companies with great dividends that may actually do better when El Nino comes knocking. You can read about them by clicking here. 

Dan Newman owns shares of Starbucks. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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