It is hard to imagine the market going up if oil prices are going down. While gas prices have consistently undermined consumer spending in the U.S. and elsewhere during the last couple years, the correlation between rising energy costs and a market rally's prices has been pretty strong as well.
While oil prices have been volatile because of events in the middle east, currency moves, and economic data, the S&P 500 and its tracking exchange traded fund SPY (SPY) has generally followed oil prices fairly closely during the now nearly six month rally.
While oil prices rose ahead of the market near year end, as the threat of Iran closing the Strait of Hormuz seemed real, bearish inventory numbers and weak economic data have also caused oil to sell-off consistently since WTI prices peaked in late February at around $110 a barrel.
Still, while oil prices have been heavily correlated with the performance of most of the broader indexes, there are a number of companies in the retail and transport sector who will benefit significantly from even a modest decline in oil prices.
Darden Restaurants (DRI) has consistently beat earnings estimates and raised the company's dividends for several years. Owning Red Lobster, Olive Garden, and the more upscale Texas Longhorn chains, Darden has taken significant market share from its North American peers during the last several years.
Darden trades at less than 12x a reasonable estimates of next year's earnings, despite the company's consistently strong double digit growth and strong dividend.
Darden is uniquely positioned to benefit from falling oil prices since the company targets a middle to low income consumer with its Red Lobster and Olive Garden franchises. The fact that nearly 7% of Darden's float is short suggests even a moderate near-term increase in the company's profitability could cause shares to rise significantly as well.
The next company that is well-positioned to benefit from falling oil prices is United Airlines (UAL). United Airlines is the largest domestic carrier in the U.S., and the company is still one of the most leveraged companies to the price of oil today-- even as its management team has decided to hedge some of its fuel costs.
United has continually experienced problems integrating Continental since the announced merger, several years ago. Still, the company recently reported nearly a 5% rise in annual revenues and passenger traffic over the past year, even while a nearly 21% rise in fuel costs resulted in the company's operating costs rising nearly 8% year-over-year.
While United had problems with the company's recent merger with Continental, its recent earnings report was strong and analysts believe most of the issues with the merger are likely behind the company. United also has strong exposure to the emerging markets, and the company recently reported a nearly 7% increase in Latin American traffic this past quarter. United has nearly $8 billion in cash on its balance sheet and strong current cash flow as well.
Another company in the transport industry whose shares are trading near the company's 52 week low despite a strong recent earnings report is GM (GM). GM recently reported a strong quarter with North American sales 35 percent higher than last year. GM reported weakness in the company's European division, and a 10% drop in sales in Asia. GM went public at $33 a share, and is currently trading at nearly $22 dollars a share, with a forward price-to-earnings ratio of around 5 and price to sales of less than .2.
GM recently raised the company's guidance for North American car sales for this year by nearly from 13.5 million to 14.5 million, and the company is much more levered to the middle income consumer than other luxury car dealers with the company's Chevrolet and Buick brands. GM also still has strong exposure to the weak SUV market with the brand GMC, with SUV sales making up about a fourth of the company's total auto sales.
Asia and Europe have been economically weak for some time, and GM has consistently outperformed nearly all foreign automakers in the largest emerging market like China and India. Recent earnings reports from the largest banks and car sales reported by a number of auto companies suggest the U.S. consumer is still fairly strong. While light-car and hybrid sales have been the biggest driver of most of the major U.S. auto companies' earnings over the last couple years, a significant drop in fuel prices could drive up demand for SUVs.
To conclude, the S&P 500 and most of the broader indexes have been fairly closely correlated with energy prices. There are sectors in the market that will benefit significant from a pullback in crude prices. A pullback in oil prices may only result in gas prices falling slightly, a psychological boost of paying less at the pump should still improve overall consumer sentiment.
With sectors like technology-- led by Apple (AAPL)-- already up significantly this year, and financials like Citigroup (C) and JP Morgan (JPM) up over 30% this year alone as well, institutions may look for new investments in the summer. With falling energy prices likely to only benefit most banks and tech companies marginally, a stronger consumer and lower operating costs could benefit retail and transport companies nicely.
While, the S&P 500 and its tracking exchange traded fund SPY may continue to drop if energy prices decline, some sectors will benefit significantly if companies in these sectors see stronger consumer spending and lower costs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
