Oil's Rapid Fall Creates Hidden Opportunities

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Includes: FSLR, PPL, SPWR, TAN, XOM
by: Anthony Brunson

Summary

It is not too early to purchase oil stocks.

Decreased oil prices have created an opportunity to purchase solar stocks at a discount.

Pennsylvania Power and Light is investing in solar which may begin a domino effect in the next few years.

It is not too early to purchase oil stocks

We live in a world where everything seems to affect everything else. It hasn't always been that way though. Needless to say, the rapid transmittal of information over the internet has changed the world, and the consolidation of that information into individual sites like Facebook and Twitter make it seem like everything is happening in a single place. This amplifies any single event once it is piled in with other like events.

If you are not following the oil price declines, chances are you have noticed that it doesn't take as much to fill up your car. With the price of oil at around $55 per barrel, people are asking how much farther it can go. Gas has fluctuated for my entire adult life from approximately $2.00 to $4.50 per gallon. Now, we're nearing the $2.00 mark in some sections of the country and have already touched below this in others. This offers a buying opportunity on stocks such as Exxon Mobil Corp. (NYSE:XOM), which will grow from a rebound in oil prices and also offers a dividend yield of 2.92%.

It is important to understand why the price is falling. The main factor is that supply is rising. Just this week the market overreacted when some "hidden barrels" were found. The logic was, "because there are more barrels now, we better sell our stock because profit margins will be lower!" That is absolutely ludicrous and has nothing to do with the fundamentals of any companies nor does it have to do with overall demand for oil going down. Now, to be fair, On December 10, 2014, OPEC said that demand for its oil will decline to 28.9 million barrels a day in 2015, down from 29.4 million barrels a day in 2014. But the reactions of the market are leaning towards a fear of increased supply as opposed to a decrease in demand.

XOM is a long term strategy and if you intend on investing and not speculating, it could be a solid buy. It is very possible that the bottom has yet to come on oil but I will just use that opportunity to add more shares. Additionally, a solid investment option is to sell deep out of the money covered calls in order to supplement your income that is already being generated from the dividend and price appreciation. The obvious risk is that on a dramatic price hike, you would lose the upside potential above your strike price. But, properly implemented, selling covered calls can be a sound decision.

Decreased oil prices have created an opportunity to purchase solar stocks at a discount

The Guggenheim Solar ETF (NYSE: TAN) has lost roughly 48% since March. This selloff is not justified because gas prices will surely rebound and solar will become the focus again. Solar companies have struggled due to the sheer cost of new technologies and avid lobbying by big oil companies. 2 popular companies are First Solar (NASDAQ: FSLR) and Sun Power (NASDAQ: SPWR). Both of these companies took around a 20% hit in the last month alone due to the declining oil prices.

If you go back into the history of any common technology, there was a point when it was unaffordable. The only people that used them were larger corporations and government agencies. One example is the computer. The military had large computers that filled up rooms and the pricing was prohibitive for the average person. It wasn't until the 1990's that the personal computer became more affordable for citizens. But don't mistake my use of the word "affordable". The cost was still roughly $2000 to get a computer that does less than 10% of what computers are capable of now. The only people that could afford them were people with solid incomes.

Now, nearly everyone has some form of a computer or tablet. It doesn't matter what background you come from.

The point is, solar is currently in the phase that computers were in from the 1970's to 1980's. When I drive down the highway I see solar panels that power the street lights. When I drive onto a military installation, I see fields of solar panels powering their dorms. Government agencies are taking full advantage of solar technologies; however, there are still many parts of the country that have not begun.

As I mentioned previously, the migration of information to single sources allows knowledge to spread more rapidly. As companies begin to implement solar, I believe a domino effect will occur as other companies use each other as models for progress.

Pennsylvania Power and Light (NYSE: PPL) is investing in solar which may begin a domino effect in the next few years

One corporation that is setting the stage for solar power is PPL. In 2016, two of their subsidiaries (Kentucky Utilities Co. and Louisville Gas & Electric Co.) will begin operating the state's first major solar-powered electric generating facility in Mercer County. The project will cost $36 million dollars and support up to 80,000 homes. The tax credits and relief from emissions costs will partially offset the initial investment, meaning a rate hike will be minimal.

Based on the current cycle of fuel costs, by 2016, oil may rebound in price. If this occurs, companies like PPL will have an edge on affordability in the market and I anticipate that other utility companies around the country will follow suit.

PPL has a dividend yield of 4.3% and from a technical standpoint is heading in the right direction. However, I will not rate this as a strong buy for underlying fundamental reasons. From a fundamental standpoint, the company's revenue has declined over the last 3 years from $12.7B to $12.3B to $11.9B for 2011-2013 respectively while the stock price has consistently gone up. But with the minimal rate hike that is being forecasted, revenue should rebound going forward. Additionally, although revenues have declined, annual earnings per share increased in 2012 and 2013. Q1 of 2014 was a weak quarter with $1.2B in revenues vs. a $2.9B consensus; however, the stock price was not negatively affected by this announcement.

Additionally, the utilities sector will be under great scrutiny in 2015 because it was the greatest performing sector in 2014. It returned a whopping 31.1%. This means that the fundamentals may catch up to many of them once interest is lost in utilities. Utilities generally provide higher than average dividend-payments and the rise may be attributed to that.

The main reason for the inclusion of PPL in this article is to illustrate the adoption of solar around the country. But, it would be irresponsible to discuss them without giving a bit of background. I will be watching this stock and once their earnings are reported in February of 2015, I will decide if this should be added to my long term portfolio.

Conclusion

Oil may be a sound investment for a long term investor; but don't confuse price fluctuations with demand. Oil is still in demand and if you have a horizon of 5 years or more, there is no reason why you shouldn't research companies to invest in. Exxon Mobil is a larger, more popular corporation; but there are several other options out there.

Solar power is becoming cheaper year after year and as explained, the stock prices have taken a hit as a direct result of lower oil costs. If the technology follows the same path as all of our other great technologies, solar products will become so affordable that it will become as common as the doorbell. If you have a time horizon of 10 years or more, solar may be a proper investment for you to investigate.

PPL connects solar and utilities. It is proof that large contracts are happening that strengthen the solar market. Regardless of oil prices, their $36 million project is still happening. Once their project is completed, a butterfly effect may occur, growing the solar market exponentially.

Disclosure: The author is long XOM.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.