3 Stocks That Win, 3 That Lose In The Oil Surge

Includes: CCL, COP, CVX, MGM, RCL, XOM
by: Hawkinvest

In an ominous sign, oil has been surging very early into 2012. Normally, oil will see a seasonal move higher around May or June, just before the summer driving season starts. The recent move in oil has been supported by investors who are interested in owning hard assets, like oil and precious metals, that can't be printed, like paper currencies.

It has also moved on concerns that Iran could block a major oil transportation route - the Strait of Hormuz. These dynamics present opportunities and risks for investors, since the price action could be a major sign to buy oil stocks and sell stocks in companies that could be hit very hard if consumers suddenly cut back on spending later this year.

A recent AP article details the current situation for gas prices:

Gasoline prices have never been higher this time of the year. At $3.53 a gallon, prices are already up 25 cents since Jan. 1. And experts say they could reach a record $4.25 a gallon by late April. "You're going to see a lot more staycations this year," says Michael Lynch, president of Strategic Energy & Economic Research. "When the price gets anywhere near $4, you really see people react.

The rise in oil appears likely to continue, and now could be the time to act, before tensions with Iran possibly heat up further and before oil sees increased demand from the summer driving season. In certain parts of the country, gasoline is well over $4 per gallon already. States that already have major economic challenges, like California, which is still facing high unemployment and foreclosure levels, could easily see gasoline at $5 per gallon or more in the next few months.

The stocks below are highly sensitive to either the economy and oil prices. Here are some names to consider buying or selling based on the uptrend in oil. The first 3 stocks could benefit greatly from a spike in oil prices and the last 3 could be negatively impacted:

ConocoPhillips (NYSE:COP) is a leading oil and gas company involved in exploration, production, refining, and transportation of petroleum products. ConocoPhillips appears undervalued, as it offers a solid dividend yield and a price to earnings ratio of just about 9 times earnings. This stock could have an upside catalyst in the coming months, as the company plans to spin-off the refining division, which will become a separate, publicly traded company called Phillips 66. This company has extensive oil reserves which can grow as the company makes new finds, and these reserves also grow more valuable as the price of oil trends higher. This stock has been rising, so waiting for pullbacks makes sense. Recently, it's been possible to buy Conoco shares at below $70 per share, and that would be a very attractive entry point.

Here are some key points for COP:

  • Current share price: $73.83
  • The 52 week range is $58.65 to $81.80
  • Earnings estimates for 2011: $8.27 per share
  • Earnings estimates for 2012: $8.75 per share
  • Annual dividend: $2.64 per share which yields 3.6%

Exxon (NYSE:XOM) is a must-own stock for many oil investors. This company has a strong balance sheet and a very significant reserve base, which grows in value with the price of oil. Exxon recently reported solid results with earnings for the fourth quarter of 2011 coming in at $1.97 per share. The company also reported that it bought back about $5 billion worth of shares. Weaker margins in the refinery business did impact results, but overall, the report shows that the company is poised for a solid year ahead. Exxon has a very strong balance sheet and it can afford to continue buying back shares which will help to boost future earnings. This stock was trading for about $80 per share in December, but has been trending higher. Exxon shares have recently been finding support around $83 per share, so buying on dips at that level are particularly attractive.

Here are some key points for XOM:

  • Current share price: $86.57
  • The 52 week range is $67.03 to $88.23
  • Earnings estimates for 2011: $8.25 per share
  • Earnings estimates for 2012: $8.99 per share
  • Annual dividend: about $1.88 per share which yields about 2.2%

Chevron Corporation (NYSE:CVX) is a leading integrated energy company with exposure to oil, natural gas, refining, etc. This could be one of the most undervalued stocks in the market. Chevron pays a dividend that beats many other stock and bond yields, plus it has a below market price to earnings ratio of about 8 times earnings. The average stock in the S&P 500 Index currently trades for over 12 times earnings. If oil prices continue to rise, the already healthy profit estimates for Chevron might be too low. With oil prices showing strength this early in the season, Chevron could be poised to beat earnings in the coming months. However, the stock is trading at the upper end of the recent trading range. Recently, it has been possible to buy this stock at about $102 per share, so waiting for dips could pay off.

Here are some key points for CVX:

  • Current share price: $104.25
  • The 52 week range is $85.63 to $110.01
  • Earnings estimates for 2012: $12.66 per share
  • Earnings estimates for 2013: $13.20 per share
  • Annual dividend: $3.42 per share which yields 3.1%

MGM Resorts International (NYSE:MGM) is one of the world's largest hotel and casino companies, based in Las Vegas. Since December, MGM shares have been trading in a range of about $9, to almost $15 per share. The stock is now at the upper limit of the recent trading range which means that the risk of holding or buying this stock right now, could be elevated. MGM shares have rallied with the markets but appear extended and vulnerable to a sell-off. The company has a heavy debt load and it has been reporting losses. The balance sheet has about $13.45 billion in debt and only about $1.97 billion in cash. MGM could be impacted by higher oil prices because many consumers could cut back on spending if they go to Las Vegas, and some might decide not to go at all, and instead opt for a "staycation." With MGM facing challenges and the shares near recent highs, it could make sense to sell now and buy on dips later this year.

Here are some key points for MGM:

  • Current share price: $14.18
  • The 52 week range is $7.40 to $16.05
  • Earnings estimates for 2011: a loss of 53 cents per share
  • Earnings estimates for 2012: a loss of 39 cents per share
  • Annual dividend: none

Carnival Corporation (NYSE:CCL) is a leading cruise line company, operating under various brands which include: Carnival Cruise Lines, Seabourn, Holland America Line, Princess Cruises, Cunard, AIDA, Ibero Cruises, P&O Cruises and Costa Cruises. Carnival is currently facing a number of issues which include the recent capsizing of the Costa Concordia cruise liner off the coast of Italy. That cruise line disaster has resulted in extra expenses, and the company recently warned that it saw reduced bookings. It also said it could not estimate the full impact of the loss at this time.

Carnival has significant exposure to the economy in Europe, and that could be a further drag on results. European consumers might cut back on vacation spending over economic concerns and high prices at the pump. In addition, fuel is a major expense for this company, and rising oil prices could hurt financial results for Carnival in the coming months. The stock might drop further as these headwinds continue over the coming months.

Here are some key points for CCL:

  • Current share price: $30.74
  • The 52 week range is $28.52 to $44.11
  • Earnings estimates for 2012: $2.18 per share
  • Earnings estimates for 2013: $2.62 per share
  • Annual dividend: $1 per share which yields about 3.2%

Royal Caribbean Cruises (NYSE:RCL) is one of Carnival's competitors in the cruise industry. Royal does not have the same issues as Carnival in terms of the Costa Concordia incident, but it could be impacted by discounting in cruise fares, as well as higher fuel costs. Royal Caribbean shares were recently downgraded to a strong sell by Zacks Investment Research, and a recent analyst report states:

We are a bit doubtful about the cruising sector in the near term after Carnival's ship Costa Concordia ran aground in mid-January on Italy's west coast. The disaster hit the industry in the wake of the wave season between January and March. The recent tragedy resulted in subdued bookings. Royal Caribbean's overall booking volumes in North America came down. In Europe, where the incident took place, the cut in bookings has been steeper. Business in APMEA was also down slightly. The company expects a 20% decline in new bookings during the peak of wave season.

This stock was trading below $26 in early January, but it has rallied with the markets. With oil prices trending higher, and the stock at the high end of the recent trading range, the shares look vulnerable to a pullback.

Here are some key points for RCL:

  • Current share price: $29.89
  • The 52 week range is $18.70 to $45.45
  • Earnings estimates for 2011: $2.32 per share
  • Earnings estimates for 2012: $2.94 per share
  • Annual dividend: 40 cents per share which yields about 1.3%

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.