In the last few days, we have seen a huge plunge in oil prices, a continued plunge in silver prices, and commodities in general. The recent price action shows how crowded trades can end badly for those involved. Too many people were long (and leveraged) on oil, silver, and other commodities. When everyone is buying the same asset class and very confident about it, that is a huge warning sign that it may have reached a tipping point.
The big drop in oil (nearly 10% lower in a single day) is a huge positive for the global economy. If oil remains around $100 or less, it will benefit just about every major company due to lower costs, and most likely increased consumer demand. The price of oil and other commodities affects the cost of manufacturing goods, shipping, etc., and it also affects consumer spending. Consumers will have more money and are far more likely to spend money on things like clothing, vacations, automobiles and other goods, if gas costs less than $4 per gallon. The stocks discussed below will all benefit significantly from lower oil and commodities prices if they remain off their recent highs:
MGM Resorts (MGM) shares are trading at $14.32. MGM is a major hotel and casino company, based in Las Vegas. The 50 day moving average is $13.24 and the 200 day moving average is $12.69. Earnings estimates for MGM are for a loss of about 62 cents per share in 2011.
How MGM benefits from lower commodities prices: Consumers are far more likely to feel comfortable enough to vacation in Las Vegas, when they don't have to spend so much filling their tanks. Consumers are not only more likely to take trips to Las Vegas but, once they get there, they are more likely to increase spending on food, rooms, gambling and other services, which can boost revenues for MGM.
Bank of America (BAC) shares are trading at $12.31. The 50 day moving average is about $13.81 and the 200 day moving average is about $13.31, so these shares are trading below support levels now. Earnings estimates are about $1.07 for 2011, and $1.73 for 2012. This gives BAC shares a PE ratio of only about 10 times earnings. The dividend is 4 cents per share per year, which is a yield of about .3%.
How Bank of America benefits from lower commodities prices: Lower oil prices benefits the entire U.S. economy and make another recession much less likely. What's good for the U.S. economy, is good for Bank of America. No recession over high oil prices means fewer foreclosures, lower unemployment, increased business loans and other activities that generate revenue for Bank of America and make defaults on all types of loans less likely.
General Motors (GM) shares are trading at $32.02. General Motors is one of the largest automakers worldwide. The 50 day moving average is $31.75. Earnings estimates for GM are just over $4 per share in 2011, and even more for 2012, so the PE ratio is only about 8.
How GM benefits from lower commodity prices: These shares were out of favor over concerns about parts supplies from Japan, frequent management changes, and the potential for slower auto sales as gas prices soar over $4 in most parts of the country, etc. However, the shares are very cheap on a PE ratio basis. If gas prices stay at $100 or less, and remain stable going forward, it will definitely boost demand for auto sales, and for the higher margin vehicles like trucks and sport utility vehicles. Lower steel prices and other raw materials like plastic, would also boost margins for GM.
Ford Motor Co. (F) shares are trading at $15.08. The 50 day moving average is about $14.90 and the 200 day moving average is about $14.81, so these shares are trading near strong support levels. Ford shares hit a 52 week high of $18.97 earlier this year. Earnings estimates for F are $1.91 per share in 2011, and even more for 2012 which puts the PE ratio at about 7. But, the shares are very cheap on a PE ratio basis and Ford sales have been strong.
How Ford benefits from lower commodity prices: Basically, Ford will see the same benefits shown above for General Motors.
United Continental Holdings Inc., (UAL) shares are trading at $25.79. United is a major global airline, and right now, it is a play on energy because the airline sector is currently trading based on the price of oil. The RSI for UAL is about 69, so these shares are near overbought levels. The 50 day moving average is $22.82 and the 200 day moving average is $24.37. 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.
How United benefits from lower commodity prices: Fuel costs are a major expense for any airline. In the past several months, this stock had moved down sharply as oil moved up. However, the shares have rallied substantially off their lows, and now are reaching overbought levels. I would not buy at these levels, but if the stock drops to about $23 or below, it's probably a good time to buy for the long term.
Royal Caribbean Cruises (RCL) shares are trading at $41.96. RCL is a major cruise line company, based in Las Vegas. The 50 day moving average is $40.94 and the 200 day moving average is $38.64. Earnings estimates for RCL are for a profit of about $3.25 cents per share in 2011 and $3.88 in 2012.
How RCL benefits from lower commodities prices: Just as with airlines, fuel costs are a major expense for cruise lines. Lower fuel costs means better profit margins and more bookings. Consumers are far more likely to feel comfortable enough to take a cruise when they don't have to spend so much on gas. Consumers are also far more likely to increase spending on beverages, more expensive cabins, gambling and other services which can boost revenues for RCL. These shares shot up today as oil plunged, so I would wait for pullbacks before making any new purchases.
The data is 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. The information contained herein is for informational purposes.