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Winners Of The Oil Pullback
Over the past two weeks oil has lost $20 of its value per barrel and some areas of the stock market have responded positively. With the price of oil continuing to fall, it will have a direct effect on sectors that count fuel as a major expenditure. The first that comes to mind are the airlines and auto makers, but there are others that have been benefiting from the pullback.
Airlines
When the largest expenditure for your company is fuel and the price of oil pulls back, it will no doubt help the bottom line. High oil also affects the demand for its services because consumers will tighten their wallets and may cancel the family vacation that requires an airline flight.
During an eight-day span in July, UAL Corp. (Nasdaq:UAUA), parent company of United Airlines, rose over 250%. Granted the stock was down 90% for the year heading into the rally and the $7 move was barely a blip on the screen. If you believe oil continues to fall, there is no doubt the airlines could be the biggest beneficiaries. That said, the airline industry is a flawed business in my mind and I will not take the risk of investing in the stocks. (For more, read Is That Airline Ready For Lift-Off?)
Financials
Oil hit its high on June 11, 2008 just two trading sessions before the Financial Select Sector SPDR Fund (AMEX:XLF) rallied from a multi-year low. In the week following the low, XLF rallied 31% as the price of oil tumbled. There may not be a direct connection with the price of oil and the financials, but recently the market has been driven by the price of the financial stocks. With oil falling it will help prop up the overall market, and with the financials being so beaten down and the main driver, expect the inverse relationship to continue.
One of the best performers during the rally from the lows in the financial sector was Bank of America (NYSE:BAC). The stock was able to get back above the 50-day moving average for the first time in months and has completed its purchase of Countrywide Financial, the largest mortgage lender in the U.S. As fuel prices fall, it will help spur the consumer, which in turn could lead to an increased demand for mortgages. This along with increased banking services needed from investors in the U.S. and abroad will help BAC. (Also check out Analyzing A Bank's Financial Statements.)
Autos
The U.S. automakers have been in the doldrums for nearly the entire decade, but this year has been especially rough for General Motors (NYSE:GM) and Ford (NYSE:F) with oil prices surging. Both companies were late to the hybrid and small-car party, and this delay has really hurt sales. They can't give away their oversized SUVs.
The combination of a movement toward hybrid, high MPG vehicles combined with lower oil prices will be a major boost to not only the US auto makers, but those abroad as well. Again, the risk is the business model of the specific companies. One of the few autos that have held up well in this market is Honda (NYSE:HMC), and therefore it would be the first stock I would consider. (For more on hybrid cars, check out Hybrids: Financial Friends Or Foes?)
Homebuilders
A 30% rally in just over one week was how the SPDR S&P Homebuilders ETF (AMEX:XHB) reacted to oil dropping from a high. The reason the homebuilders have had an inverse relationship with the price of oil is squarely on the consumer. With less disposable income due to high gas prices, most families are worried about paying their current mortgage and are not considering upgrading their living situation. If anything, homeowners are downsizing to apartments and selling their homes, thus increasing the inventory for the homebuilders.
Pulte Homes (NYSE:PHM) is just one of the many homebuilders that has been punished over the last three years. Recently the company was trading at levels not seen since 2001 as its presence in the West and Southeast has hurt sales. That said, these very regions that have hurt Pulte could now be what leads the stock higher. Home prices have fallen so much during the last few years that potential homebuyers are beginning to recognize that bargain prices may be near. (To learn more, check out Why Housing Market Bubbles Pop and Short Sell Your Home To Avoid Foreclosure.)
Proceed With Caution
Keep in mind that oil is pulling back from the $145 level, but remains well above the century mark. Historically speaking, the price is still high. Also, the pullback may be simply just that - a pullback in an oil bull market. If that is the case, expect the above-mentioned sectors to continue to struggle.
Airlines
When the largest expenditure for your company is fuel and the price of oil pulls back, it will no doubt help the bottom line. High oil also affects the demand for its services because consumers will tighten their wallets and may cancel the family vacation that requires an airline flight.
During an eight-day span in July, UAL Corp. (Nasdaq:UAUA), parent company of United Airlines, rose over 250%. Granted the stock was down 90% for the year heading into the rally and the $7 move was barely a blip on the screen. If you believe oil continues to fall, there is no doubt the airlines could be the biggest beneficiaries. That said, the airline industry is a flawed business in my mind and I will not take the risk of investing in the stocks. (For more, read Is That Airline Ready For Lift-Off?)
Financials
Oil hit its high on June 11, 2008 just two trading sessions before the Financial Select Sector SPDR Fund (AMEX:XLF) rallied from a multi-year low. In the week following the low, XLF rallied 31% as the price of oil tumbled. There may not be a direct connection with the price of oil and the financials, but recently the market has been driven by the price of the financial stocks. With oil falling it will help prop up the overall market, and with the financials being so beaten down and the main driver, expect the inverse relationship to continue.
Autos
The U.S. automakers have been in the doldrums for nearly the entire decade, but this year has been especially rough for General Motors (NYSE:GM) and Ford (NYSE:F) with oil prices surging. Both companies were late to the hybrid and small-car party, and this delay has really hurt sales. They can't give away their oversized SUVs.
The combination of a movement toward hybrid, high MPG vehicles combined with lower oil prices will be a major boost to not only the US auto makers, but those abroad as well. Again, the risk is the business model of the specific companies. One of the few autos that have held up well in this market is Honda (NYSE:HMC), and therefore it would be the first stock I would consider. (For more on hybrid cars, check out Hybrids: Financial Friends Or Foes?)
Homebuilders
A 30% rally in just over one week was how the SPDR S&P Homebuilders ETF (AMEX:XHB) reacted to oil dropping from a high. The reason the homebuilders have had an inverse relationship with the price of oil is squarely on the consumer. With less disposable income due to high gas prices, most families are worried about paying their current mortgage and are not considering upgrading their living situation. If anything, homeowners are downsizing to apartments and selling their homes, thus increasing the inventory for the homebuilders.
Pulte Homes (NYSE:PHM) is just one of the many homebuilders that has been punished over the last three years. Recently the company was trading at levels not seen since 2001 as its presence in the West and Southeast has hurt sales. That said, these very regions that have hurt Pulte could now be what leads the stock higher. Home prices have fallen so much during the last few years that potential homebuyers are beginning to recognize that bargain prices may be near. (To learn more, check out Why Housing Market Bubbles Pop and Short Sell Your Home To Avoid Foreclosure.)
Proceed With Caution
Keep in mind that oil is pulling back from the $145 level, but remains well above the century mark. Historically speaking, the price is still high. Also, the pullback may be simply just that - a pullback in an oil bull market. If that is the case, expect the above-mentioned sectors to continue to struggle.
by
Matthew McCall
Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.
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