5 Ways to Profit From Crashing Oil Prices

Oil has been in a historic slide and that means opportunities for investors.

By
DAVE S. GILREATH, CFP®
January 15, 2015, 6:19 AM ET
5 min read

— -- The decline in oil prices, initially welcomed as a boon to the pocketbooks of American consumers, has prompted concerns about a negative impact on the global economy and ensuing stock market jitters.

Several months ago, the price per barrel was in the $90 range. This month, it has dipped below $50, prompting stock market hiccups.

While the markets ponder the negative implications of declining oil, at the end of the day, it’s nothing more than a textbook example of commodity pricing: The result of a historically large above-ground supply. Inevitably, over the coming months or certainly years, oil prices will rise again, much to the elation or chagrin of opposing investor camps.

When this will happen is anybody’s guess, as is often the case regarding commodity-price forecasting. But in the meantime, cheaper oil is creating opportunities for profit in sectors that are directly and indirectly affected by it. By getting into these industries now, you will probably benefit from increasing share prices propelled by earnings improved directly or indirectly by lower oil prices.

These industries include:

  • Car manufacturing. Or, I should say, trucks. Nostalgically low gasoline prices are a boon to General Motors and Ford, big manufacturers of pickup trucks and sport-utility vehicles. This truck-chassis category accounts for about 67 percent of Ford’s total sales and about 60 percent of GM’s. As a result, a developing American consumer inclination to buy bigger because of lower pump prices will increase sales for these two manufacturers more than any other factor, global or domestic. Insofar as lower fuel prices will cause people to buy any type of vehicle sooner than they’d planned, most or all classes of vehicles will benefit.

    But vehicles with heavy chassis stand to benefit the most. Boosted by a fuel-price-related surge late in 2014, this category accounted for one in three vehicle sales for the year. In the 1990s, it was one out of five. Economic naysayers claim that all auto sales will be dampened by interest rate increases that we’ve been waiting for on the edge of our seats for years now. But this concern is illogical. Even if the Federal Reserve notches up the prime rate, triggering higher rates on loans, this has only a slight effect (in the tens of dollars per month) on car loan payments because these loans run for only 48 to 60 months. Rather, it’s the application of higher interest rates to 20- and 30-year mortgage loans that results in significant differences in monthly payments.

  • Delivery stocks. For FedEx, UPS and other delivery companies, fuel prices are critical. These companies have been blessed by increases in online shopping, and with fuel prices lower, this increased volume will translate nicely into higher profit margins, increasing earnings for shareholders and their stocks’ market allure. Trucking companies are also benefiting from lower fuel costs, but to the extent that online shopping means less trucking of goods to bricks-and-mortar retail outlets, they will have less volume. Delivery stocks have the happy combination of rising volume and lower costs.

  • Airlines. Long-haul carriers will benefit the most from lower prices because of high fuel consumption on long flights. So airlines in this category with good fundamentals, such as Delta and Alaska Air, are likely to be increasingly attractive to investors. One way to invest in the energy-price-related prospects of car companies, delivery stocks and airlines is through what’s known as a transport ETF, such as XTN; its holdings span all three categories.
  • Cruise lines. Cruise line companies such as Carnival and Royal Caribbean benefit from cheaper fuel two ways: lower operating costs and the likelihood of increasing sales to people who are spending a lot less money commuting to work.
  • Theme parks. While Disney, the big kahuna of all theme parks, will benefit from lower gas prices that enable families to travel at less expense, the profits of this huge, multi-varied company are also dependent on other ventures, including movies. (The Walt Disney Co. is the parent company of ABC News.) But pure theme park companies like Cedar Fair Entertainment Co. (FUN) may benefit proportionately more.

    • While these probably wouldn’t be long-term plays, except in cases where specific companies have other, sustained virtues, they’d be profitable at least for the duration of the lower energy prices.

    On a?contrarian basis, depending on your investing time horizon and your expectations for a rebound in oil, you might want to just buy oil-related companies while they’re down. But instead of just an energy-index ETF, consider one that provides the best of the oil patch (where companies have been screened for their financial health), such as First Trust Energy AlphaDEX ETF (FXN).

    Even in the short term, the idea of positioning for the stock market effects of an oil price rebound may have merit, based on market history. The pendulum of any significant price movement, propelled by the momentum of investor emotion (in this case, fear-driven selling) almost always swings so far in one direction that it must come back the other way. The only questions are when and how much.

    Any opinions expressed are solely those of the author and not of ABC News.

    Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry, beginning with Bache Halsey Stuart Shields and later Morgan Stanley/Dean Witter. At Sheaff Brock, he shares responsibility for setting investment policy, asset allocation and security selection for the company's managed accounts. He also consults with the clients on portfolio construction. Gilreath received his Certified Financial Planner® (CFP) designation in 1984. He attended Miami University in Oxford, Ohio, where he earned a B.S. degree.

    But vehicles with heavy chassis stand to benefit the most. Boosted by a fuel-price-related surge late in 2014, this category accounted for one in three vehicle sales for the year. In the 1990s, it was one out of five. Economic naysayers claim that all auto sales will be dampened by interest rate increases that we’ve been waiting for on the edge of our seats for years now. But this concern is illogical. Even if the Federal Reserve notches up the prime rate, triggering higher rates on loans, this has only a slight effect (in the tens of dollars per month) on car loan payments because these loans run for only 48 to 60 months. Rather, it’s the application of higher interest rates to 20- and 30-year mortgage loans that results in significant differences in monthly payments.

  • Delivery stocks. For FedEx, UPS and other delivery companies, fuel prices are critical. These companies have been blessed by increases in online shopping, and with fuel prices lower, this increased volume will translate nicely into higher profit margins, increasing earnings for shareholders and their stocks’ market allure. Trucking companies are also benefiting from lower fuel costs, but to the extent that online shopping means less trucking of goods to bricks-and-mortar retail outlets, they will have less volume. Delivery stocks have the happy combination of rising volume and lower costs.

  • Airlines. Long-haul carriers will benefit the most from lower prices because of high fuel consumption on long flights. So airlines in this category with good fundamentals, such as Delta and Alaska Air, are likely to be increasingly attractive to investors. One way to invest in the energy-price-related prospects of car companies, delivery stocks and airlines is through what’s known as a transport ETF, such as XTN; its holdings span all three categories.
  • Cruise lines. Cruise line companies such as Carnival and Royal Caribbean benefit from cheaper fuel two ways: lower operating costs and the likelihood of increasing sales to people who are spending a lot less money commuting to work.
  • Theme parks. While Disney, the big kahuna of all theme parks, will benefit from lower gas prices that enable families to travel at less expense, the profits of this huge, multi-varied company are also dependent on other ventures, including movies. (The Walt Disney Co. is the parent company of ABC News.) But pure theme park companies like Cedar Fair Entertainment Co. (FUN) may benefit proportionately more.

    • While these probably wouldn’t be long-term plays, except in cases where specific companies have other, sustained virtues, they’d be profitable at least for the duration of the lower energy prices.

    On a?contrarian basis, depending on your investing time horizon and your expectations for a rebound in oil, you might want to just buy oil-related companies while they’re down. But instead of just an energy-index ETF, consider one that provides the best of the oil patch (where companies have been screened for their financial health), such as First Trust Energy AlphaDEX ETF (FXN).

    Even in the short term, the idea of positioning for the stock market effects of an oil price rebound may have merit, based on market history. The pendulum of any significant price movement, propelled by the momentum of investor emotion (in this case, fear-driven selling) almost always swings so far in one direction that it must come back the other way. The only questions are when and how much.

    Any opinions expressed are solely those of the author and not of ABC News.

    Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry, beginning with Bache Halsey Stuart Shields and later Morgan Stanley/Dean Witter. At Sheaff Brock, he shares responsibility for setting investment policy, asset allocation and security selection for the company's managed accounts. He also consults with the clients on portfolio construction. Gilreath received his Certified Financial Planner® (CFP) designation in 1984. He attended Miami University in Oxford, Ohio, where he earned a B.S. degree.