Prices of oil have begun the year just where they left off in 2014. The slide in crude continues unabated with WTI crude slipping below the $50-a-barrel mark on Monday for a short time. Additionally, Brent crude also fell below the $53 a barrel level, sparking fears that a spurt in oil production will lead to instability in energy markets across the world.
The level which WTI crude hit briefly on Monday was its lowest since Apr 2009. This is primarily owing to plentiful North American shale supplies in the face of lackluster demand expectations, sluggish growth in China and the prevailing softness in the European economy. Strengthening of the U.S. dollar also impacted the demand for the greenback-priced crude as it is now expensive for importers to buy oil.Continuing Slide
Amid the soft oil pricing scenario, the international cartel of oil producers’ – Organization of the Petroleum Exporting Countries (OPEC) – stand against oil output cut on Thanksgiving Day added to the supply concern.
This decision is a strategic move by Saudi Arabia to get an advantage over U.S. shale producers. This is because shale oil, which has been witnessing large-scale production in the U.S over the last few years, is relatively expensive. With oil prices tumbling, it will be difficult for U.S. shale producers to garner sufficient earnings to stay afloat in the industry.
Airlines, Truckers Benefit
Fuel costs account for a considerable portion of expenses of trucking companies. The U.S. trucking industry is currently poised to benefit in two ways: 1) lower oil prices will reduce their operating expenditure, thereby boosting the bottom-line, and 2) capacity constraint in the form of driver shortage and new government regulations will drive top-line growth.
A decline in oil prices is probably even more crucial for airlines. Lower jet fuel prices have been a boon for the airline industry given the inversely proportional relation between crude prices and the value of aviation stocks. This has benefited airline stocks immensely as the cut in oil prices has reduced their operating expenses significantly, thereby aiding the bottom line.
Consumer Staples to Gain
Another class of stocks gaining from this phenomenon is consumer staples. The Fed has expressed satisfaction over an improvement in the labor market situation. However, its inflation target of 2% still seems some way off. This is again a result of lower oil prices. Lower inflation has led to a considerable fall in input costs. This further leads to cushion for the bottom line.
A stronger dollar is also contributing toward making goods more affordable. Despite the occasional decline, the dollar had remained strong through 2014, boosted by hopes of a rise in interest rates. If such a decision comes in the near future, it marks a sharp contrast to softer monetary policy in the Eurozone. On Monday, the dollar touched a new nine-year high.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Delta Air Lines, Inc. (DAL - Analyst Report) is the second largest U.S. airline and provides scheduled air transportation for passengers and cargo throughout the U.S., and around the world. The company’s route network is centered on the hub system that it operates at certain important U.S. and international airports. The hub operations include flights and the network is supported by a fleet of aircraft, which is varied in terms of size and capabilities.
Delta Air Lines holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 17.9% for the next year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.76.
Swift Transportation Co. (SWFT - Snapshot Report) is a transportation services provider across North America. The company has four operating segments, truckload, dedicated, intermodal and central refrigerated. Swift Transportation operates 40 terminals across U.S. and Mexico and is headquartered in Phoenix, Arizona. The company operates more than 16,000 trucks and is the largest full truckload carrier in North America.
Apart from a Zacks Rank #2 (Buy), the company has expected earnings growth of 14.8% for the next year. It has a P/E (F1) of 16.99x.
Reynolds American Inc.’s (RAI - Analyst Report) subsidiaries include R. J. Reynolds Tobacco Company (RJR), American Snuff Company, LLC, Santa Fe Natural Tobacco Company, Inc. and Niconovum AB.
RJR Tobacco is a leading cigarette manufacturer while American Snuff is a leading smokeless tobacco product manufacturer in the U.S. Santa Fe manufactures and markets cigarettes as well as other tobacco products under the Natural American Spirit brand.
Reynolds American holds a Zacks Rank #2 (Buy) and has expected earnings growth of 8.9% for the next year. It has a P/E (F1) of 17.12x.
The decline in oil prices seems set to continue this year. Though this may lead to losses for energy companies, other sectors may gain from this phenomenon. Given these factors, adding these stocks to your portfolio would be a prudent decision.
by Swarup Gupta
Source:http://www.zacks.com/stock/news/159425/3-stocks-to-gain-from-oil-price-slump?article_id=159425&type=BLOG
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