WEST PALM BEACH, Fl., October 3, 2016 – Perhaps oil isn’t looking quite so inviting for investors after all.
Investors previously poised for to drill back into oil investments rocked back on their heels earlier this month when the International Energy Agency opined that the oil and gas surplus is likely to last through 2017. That glut is set to continue despite OPEC’s surprise decision to cut production, eventually.
Savvy investors know one sector’s loss is another’s gain, so while oil investing may remain a slippery slope, there are plenty other ideas that are buoyed by declining oil prices.
The most loudly trumpeted impact of lower oil and gas prices is more money in the pockets of consumers to spend elsewhere. Sectors like consumer discretionary, retail, transportation & travel and restaurants often benefit when consumers don’t have to shell out for higher gas prices.
Before we go to those areas, it is worth talking a little bit about oil companies. It’s hard to invest in a company when you are essentially betting on a commodity, and it’s even harder when that commodity is controlled by a group of producers in a cartel.
That said, it’s also hard to imagine that any of the oil majors are going to wither and die in the next 10 (or 20) years, even with lower oil prices, increased technology expanding our oil reserves, and alternative technology like electric cars biting into oil consumption.
If you want to include an oil major in your portfolio, make sure you are doing it for the right reasons. Specifically, look for one that pays a good dividend and that is going to keep on paying that dividend. Chevron [CVX], for example, insists it will stick with its dividend even with lower prices, and CEO John Woods has consistently reiterated that policy. Other oil companies, on the other hand, are making wounded noises and will likely cut the dividend as prices fall.
On the international side, YPF S.A. is interesting now, as much because of Argentine President Mauricio Macri as because of the company itself. The stock was badly beaten up under former President Kirchner and her anti-business programs, and the company – along with Argentina’s economy – is starting its difficult come-back. Not to mention it has exposure to the Vaca Muerte oil field, which has proven reserves of a staggering 927 million barrels.
A major beneficiary of the continued low oil prices is consumer discretionaries – items that are in the nice to have rather than the need to have category. As consumers spend less on gas, they find a few extra dollars in their pockets for those quasi luxury items that they might otherwise put off purchasing.
One way consumers are spending those extra petro-dollars is in retail. Two strong names in the retail space are TJ Maxx [TJX] and Costco [COST].
TJ Maxx does an outstanding job of bringing value to consumers, and who doesn’t like a good deal? The latest earnings miss could actually benefit investors by lowering the stock price temporarily, giving investors a true TJ Maxx bargain.
Costco’s big advantage is that it has figured out how to retain its shoppers while Amazon is encroaching on just about every other retail space. The warehouse giant can’t outrun Amazon in terms of total sales over the long term, but it can still beat the online retailer in terms of profitability. Costco gets a double-super-bonus from falling gas prices, because the company has pumps at the retail locations, which brings patrons in the store to stock up on toilet paper (it sells more than a billion rolls a year), maple syrup and jewelry.
The high flying international name here is Alibaba [BABA]. The beauty of this business model is that Alibaba doesn’t sell anything. Instead, it brings buyers and sellers together in an online marketplace. The company is churning out strong earnings and just keeps growing, thanks to the enormous Chinese population and their growing wealth. The company is also investing in numerous other companies to ensure it is in a strong position for future success. The one landmine here is China’s government, which has steadily and quietly backed away from the company since an Alibaba-owned news site published an anti-government editorial last March. Insiders say Ma is working to heal the rift, would make everyone happy; government officials have a significant stake in Alibaba and are almost certainly crossing their fingers that this tiff blows over soon.
Transportation and Travel
Transportation and travel benefit in multiple ways from the lower gas prices. For one thing, these companies pay less for the actual fuel that, well, fuels the planes, trains and automobiles they rely on to get from here to there. Then there is the consumer angle again, with people who have put off vacations for years now itching for a get-away thanks to unused gas dollars in their pockets.
Cruise demand continues to grow around the world. Although more than half cruise passengers are from the United States, China is also seeing enormous demand, growing at around 40% a year. The star here is Norwegian Cruise Lines [NCLH], which has more than doubled its profits and revenue over the last five years. The company is the best of the cruise stocks, and is relatively cheap right now at only ten times forward earnings. There are a lot of reasons to like Norwegian, including expanding market share, company stock buy-backs, and almost unanimous love for the stock by analysts.
Another great travel name is Southwest Airlines [LUV], which has consistently done very well, even when oil prices were high and demand was weak. It is the number one US-domestic airline, with almost a quarter of the market, thanks to its friendly staff and low-cost fares. Not to mention the fact that bags don’t have to purchase their own seat and, gasp, you can actually change your flight without a penalty. The company has a very clean balance sheet and is trading around 9 times projected forward earnings, and most analysts think it is cheap right now. Good stock, good company, good reputation.
Airlines that service China theoretically make for good investments, but somehow they keep missing and are unappealing at best. The trends of higher discretionary dollars and the anti-corruption campaign seem like they should be pushing Chinese to travel far and wide to spend. While that may be the case, it’s not the Chinese airlines that are benefiting, and they don’t look likely to recover any time soon. So beware of those stocks.
Of convenience stores and gas prices
Gas station convenience stores boom when oil prices are low. That may seem counter-intuitive, but the key is that these stores are not banking on profit from the sale of gas. That stays pretty steady, with the price of gas going up when oil prices go up, and going down when oil prices go down. Of course, some will try to eek out more profit on that gas sale, but overall, the big money is elsewhere.
The real issue is the stuff inside the store. When gas prices are low, consumers stop by and fill up more often, and since they don’t have to put out as much for a full tank, they are more likely to buy cigarettes, candy or soda inside the store.
The gas glut means that at least through 2017, these convenience stores are poised for success.
An interesting name here is Casey’s General Store [CASY]. The company is a convenience store/gas station/pizza-maker extravaganza. It recently missed expectations, despite growth and profitability, but don’t let that scare you – it’s still a story to watch. It’s very well managed, and it has built incredible customer loyalty with the pizza offering. Casey’s is actually now the seventh largest pizza outlet by sales, and it is continuing to grow organically. They also have a very under-levered balance sheet, giving them options in the event that oil prices do start to climb.
With stock price tumbling more than 13% after the September 7 expectation let down, it may be a particularly good bargain buy.
Yes, Virginia, there are still good investments
The bottom line is that no matter what is going on at the macro – or even micro – environment, there are interesting investments. And at least for now, they almost certainly pay more than your average savings account.