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Almost all energy related stocks have seen large gains lately, as oil has surged since the violence started in many oil rich countries. I have been a fan of energy stocks, but due to the big gains, I have been taking profits in certain energy names as I believe this sector is overbought and due for a correction. The rise in oil that has helped so many energy names has had the exact opposite effect on the companies discussed below. I think it's a good time to start looking at stocks that could see significant gains when oil prices correct.
We have enough oil in terms of supply. What is pushing up oil prices is the instability in the Middle East and Africa. Unfortunately, the U.S. has made a half-hearted effort in Libya, which has only prolonged the conflict. Had the U.S. stayed out of the way, this conflict probably would have been over by now, and oil prices would have dropped. Conversely, had the U.S. made a whole-hearted commitment to ending the current regime in Libya, I believe this conflict would be over by now. It's going to end sooner or later, and when it does, oil will lose some of the political risk premium that has been priced in. If oil stays at these levels or goes higher, I think we will see significant demand destruction and that will also cause oil to drop, even if the issue in Libya remains unresolved. I won't be surprised if oil dips back under $100 at some point, and that could provide a better buying opportunity in the energy sector as well as create a rebound for the stocks below. I think the airline stocks below make better trades rather than long term holdings. Here are the five stocks you might want to start watching now:
Aercap Holdings, (AER) shares are trading at $12.48. Aercap is a leading aviation leasing company. The 50 day moving average is $13.99 and the 200 day moving average is $12.92. AER is estimated to earn about $1.82 per share in 2011. This puts the PE ratio at about 7, which is extremely low for this well managed company. Book value is listed at $16.26 per share, which is significantly less than the current share price.
Why Aercap could be an attractive investment: These shares are trading at a substantial discount to the market PE ratio, below book value. These shares are trading close to strong support levels, which is the 200 day moving average of $12.92. The recent drop to these levels looks like a low risk buying opportunity.
How surging oil has possibly impacted AER shares: Almost all airline and related stocks have been punished in the last several weeks. These shares were trading at nearly $16 in January, and have dropped just as oil has risen. The concern with AER seems to be that if airlines see revenues fall and fuel costs surge, it could limit future aircraft leasing deals with AER. I think these fears are overblown and that these shares are a real long term bargain.
Delta Airlines (DAL) shares are trading at $9.83. Delta is a major global airline. The 50 day moving average is $10.93 and the 200 day moving average is $11.87. DAL is estimated to earn about $1.48 per share in 2011 and $2.01 in 2012. This puts the PE ratio at about 6. Book value is listed at $1.07 per share.
Why Delta could be an attractive investment: These shares are trading at a substantial discount to the market in terms of PE ratio. The recent drop to these levels looks like a good time to start accumulating. This airline has been profitable and is expected to remain profitable.
How surging oil has possibly impacted DAL shares: Almost all airline and airline related stocks have been punished in the last several weeks. These shares were trading at about $12.50 in January, and have dropped just as oil has risen.
United Continental Holdings Inc., (UAL) shares are trading at $22.75. United is a major global airline. The 50 day moving average is $24.55 and the 200 day moving average is $24.28. UAL is estimated to earn about $4.51 per share in 2011 and $5 in 2012. This puts the PE ratio at just over 5. Book value is listed at $5.27 per share.
Why United could be an attractive investment: These shares are trading at a substantial discount to the market in terms of PE ratio. The recent drop to these levels looks like a good time to start accumulating. This airline has been profitable and is expected to remain profitable even with higher oil prices.
How surging oil has possibly impacted UAL shares: Almost all airline and related stocks have been punished in the last several weeks. These share were trading at about $27 in February, and have dropped just as oil has risen. Recent option activity indicates that some option buyers are expecting a significant rebound in UAL shares.
Pinnacle Airlines Corp (PNCL) shares are trading at $5.91. Pinnacle is a regional airline, based in Tennessee. The 50 day moving average is $6.37 and the 200 day moving average is $6.23. PNCL is estimated to earn about $1 per share in 2011 and $1.20 in 2012. This puts the PE ratio at about 6. Book value is listed at $6.41 per share.
Why Pinnacle could be an attractive investment: These shares are trading at a substantial discount to the market in terms of PE ratio and are below book value. This airline has been profitable and is expected to remain profitable. Another plus is that insiders have been buying this dip,
How surging oil has possibly impacted PNCL shares: Almost all airline and airline related stocks have been punished in the last several weeks. These share were trading over $7 in February, and have dropped just as oil has risen. I expect these shares to pop back to $7 when oil drops.
General Motors (GM) shares are trading at $32. General Motors is a major auto and truck maker. The 50 day moving average is about $34.01. Earnings estimates for GM are $4.02 per share in 2011 and $5.05 for 2012, so the PE ratio is about 8.5 on these shares.
Why GM could be an attractive investment: These shares now trade below their recent IPO price of $33. Investors are also concerned that high oil prices will impact car sales and that GM suppliers in Japan might be impacted by the earthquake. Still, if you look long term and believe the estimates, this stock looks cheap.
How surging oil has possibly affected GM share price: I think other factors have impacted GM as well, but I believe that GM and other automakers will benefit significantly when oil drops. Consumers might already be postponing truck and SUV purchases or buying more fuel efficient vehicles, which tend to be less profitable for car makers. Some investors are concerned that if oil remains around $108 or goes higher, a double dip recession is more likely. Since GM is highly sensitive to the economy, it is understandable that fresh concerns over a double dip recession would be keeping these shares down. A drop in oil would help take another recession over high oil prices off the table.
Disclaimer: Data sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. This information is solely educational in nature and not intended to serve as the basis for any investment decision.
Source: 5 Stocks That Could Surge When Oil Drops