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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Energy Investors Should Look At Auto Stocks

Energy Investors Should Look At Auto Stocks

One of the most unexpected outcomes of low oil prices has been the lack of benefit for many other industries. Pundits had talked about low oil prices benefiting everything from airlines to consumer discretionary stocks. Yet for much of the last year, precious few stocks have seen a benefit from the continued decline in oil prices.

Take the most obvious beneficiary of low oil prices– airlines. Neither airline ETF’s like JETS nor major air carriers like Delta have seen their stocks soar as oil has moved lower. Instead, most of the air carriers have had stagnant stock prices. Of course in the present market, a stagnant stock is actually an outperformer, but for the industry often touted as the biggest winner of lower oil prices, the end result is still surprising.

Global uncertainty around China and the emerging markets combined with low oil prices have created such a tsunami of worry that even stocks which should be poised to benefit if low oil prices persist have traded lower. The two best examples of this are auto stocks and retailers. Related: Get Ready for Iran’s Oil: Sanctions Could Be Removed Next Week

Auto companies generally make larger profits when they can build more expensive vehicles like SUVs and sell them at higher prices. The last decade was painful for GM, Chrysler, and Ford not only because of the financial crisis, but also because high oil prices cut the wheels out from underneath many of their most lucrative products. Now with oil trading near $30 a barrel and gas prices at multi-year lows, consumers seem to have renewed appetite for pricey gas guzzling larger vehicles which carry hefty margins. Add to this that the auto companies became leaner after the recession and that car sales are projected at roughly 17 million annually, and you should have a recipe for more optimism around car stocks. Yet Ford and General Motors have not seen any significant response from Wall Street on this point. Instead, both companies’ stocks have languished over the last year. Related:Saudi Aramco IPO More About Geopolitics Than Finance

Similarly, retailers should be major beneficiaries of low oil prices. With the price of gas at $2 or less in many parts of the country, the average consumer should have hundreds of extra dollars to spend on other goods. This should be a direct benefit to retailers from Walmart to Bed Bath & Beyond. Yet other than Amazon, many retailers are seeing their stock hurt in recent trading. For instance, the SPDR retail ETF XRT is trading at nearly 52 week lows despite holding a broad portfolio of stocks that should insulate it from idiosyncratic issues related to any given company. Related: War Between Saudi Arabia And Iran Could Send Oil Prices To $250

It’s tempting to suggest that perhaps the stock market and investors are concerned about China and global growth, and that is why the auto sector and retail sector have been running flat. That explanation might hold water in the case of the auto sector where China is a potentially important long run contributor of growth for GM and Ford. The story is much harder to swallow in the case of the retail sector where most companies are purely focused on U.S. issues. It is certainly true that individual companies may have their issues, but from Macy’s to Walmart, the entire sector is being largely discounted. For a group of firms that should be helped by low oil prices, the market certainly is not putting much faith in that hypothesis.

Economics do not lie though, and ultimately both autos and retailers should benefit from what may be a period of prolonged low oil prices. Energy sector investors looking for some diversity in their portfolios would be wise to take notice.

By Michael McDonald of Oilprice.com

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