Sometimes high gas prices can put a drag on the market, since lower consumer spending can affect companies due to higher gas prices. With consumers shifting more money towards their vehicle's fuel cost, consumers could cut the amount of discretionary spending where they feel will be the most useful. Restaurants are usually one sector that suffers from the effects of high gas prices, since rising gas prices can contribute to increases in food prices and consumers can find an acceptable substitute by cooking at home to save money. High gas prices are mentioned on the news almost on a daily basis, but in a bullish economy this hasn't stopped consumers from spending. Most gas stations across the United States have gone to pay at the pump or pre-pay before filling your vehicle. As the cost of gasoline continues to increase this should "in theory" push people into using other forms of payment besides cash, since consumers would have to carry larger amounts of cash to fill up their vehicle.
When gas prices get extremely high as they did in July 2008 at 147.30 a barrel, high gas prices can put a blanket on the market and have shown to slow down consumer spending. Even though gas prices continue to creep higher, I believe it's important to put aside negative media attention and focus on companies that can continue to profit off of high gas prices for the following reasons. First, I would focus on companies that provide products and services that are not tied to high gasoline prices. For example, e-commerce and credit card companies are two plays that are less directly tied to higher gasoline prices than restaurants, amusement parks and recreational companies, which are highly tied to gasoline prices. Another reason, if investors are still bullish on the market despite high gasoline prices, then shifting one's thinking to companies who benefit off high gas prices can save frustration in the event oil continues to head higher.
I am currently bullish on the markets overall and have been since December 2011. However, I believe there will still be winners and losers in the market and the winners will continue to produce higher profits as oil can act as a vice on the markets. The losers may not necessarily be "loser" companies, but the vice of oil can put a hamper on business. Visa (NYSE:V) is one of the many companies that can continue to profit, since high gasoline prices can actually benefit Visa.
Visa is a payment technology company that allows users to makes payments digitally instead of using cash or checks. With rising gasoline prices, consumers are likely to use their debit/credit cards since using a debit/credit card is easier than carrying cash. Visa can be thought of as an online toll way. Every time you go to that gas pump and swipe a debit/credit card that has a Visa logo on it, merchants have to pay a small fee and this small fee that Visa collects as Oil and other purchases get more expensive over time amounts to a large sum of money. These tiny fees that Visa collects, allows Visa to be a cash cow and this contributes to Visa having no short term debt.
Visa can also be looked at as a play on the continued advancement of payment technology. While cash will always be king, there are still many areas that digitally payment technology can expand into. One area that is looking promising for the future is the use of your cell phone as a virtual wallet. With the amount of apps that are created every day, people want more ways to access their cash in a faster, yet safe way. One of these ways already comes from Square, which allows individuals to turn their cell phones and iPads into credit card readers. Visa has an investment in Square and I believe in the future might also start catering more to the individual business owner.
If investors believe gasoline prices will trend higher for the months ahead, Visa can offer investors an alternative way to play higher gas prices without being exposed to oil. The higher gasoline prices rise, the more likely consumers will shift to using debit/credit cards rather than carry large sums of cash. Consumers also love to save whenever they can and debit/credit cards offer many rewards to help save on their vehicles fuel purchase. Besides the rising cost of gasoline, Visa also stands to benefit from increases in consumer discretionary spending and consumer confidence, since using debit/credit cards offer many advantages that cash doesn't.
In a way, Visa and other companies in the digital payment processor space offer investors the ability to make money without being fixed to one business. Instead Visa can be looked as a play on the broader economy, despite the cost of rising gasoline price at the pump. If investors are bullish on the economy and believe people are going make more digital purchases instead of using cash, then here is an option trade on Visa.
Trade: Buy May 19 2012 120/125 vertical call spread
Buy (1) 120 strike call = $4.50
Sell (1) 125 strike call = $2.38
$4.50 - $2.38 = $2.12 or ($2.12 x 100 = $212 per spread)
Break even = Strike bought 120 + price paid for spread $2.12 = $122.12 or almost a 2% move
Days to expiration = 53
Max Profit = Distance between 120 and 125 strike is 5 ( 5 - 2.12 = 2.88 or 2.88 x 100 is $288 per spread).
Visa has been drifting between the $115 and $120 level for the last month and if the $120 level holds, there could be more continued upside for Visa before earnings on May 1, 2012. I am still bullish on Visa for 2012, but with the stock continuing to make all-time highs; I prefer a risk defined trade to have some protection.
In conclusion, prices at the gas pump will continually increase/decrease and Visa will be able to profit either way. Consumers have shown that they can tough out the storm of higher gas prices and still have some discretionary income to spare. Visa also benefits from newer generations being accustomed to adapt quickly to technology. Cell phones didn't become mainstream until I was about 20 and now kids that go to kindergarten have iPhones and laptops. My point is simple and that is as the younger generations get into technology at an earlier age they will most likely use other forms of payments than the older generations who still prefer the old-fashioned way of cash and check. Sometimes betting on upside in oil can be difficult, but if investors are worried about the price of gas then sticking with companies who are the least leveraged to higher gasoline prices could be a way to combat high gas prices.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in V over the next 72 hours.