Who Wins from Falling Oil?

09/23/2014 9:00 am EST


Christian DeHaemer

Investment Director and Editor, Crisis and Opportunity

WTI crude recently hit a two-year low just above $92 a barrel. Brent was at $98 per barrel, down from $114 last year, observes Christian DeHaemer, editor of Energy & Capital.

Meanwhile, the uptrend in oil prices has been breached, which suggests we are headed lower still.

The most obvious reason for falling oil prices has to do with supply and demand. Global oil demand is the weakest since 2011, and, at the same time, the US shale boom continues to increase production.

Juxtaposed to this idea is the fact that the US dollar is also moving higher. For the most part, when one goes up, the other goes down, all courtesy of the petrodollar complex. Right now, the dollar is rising and oil is falling.

Falling oil demand is due to an economic slowdown in Europe, China, and Japan, coupled with high money printing in those economies.

Obviously, investors want a strengthening currency and an expanding economy—thus they buy dollars—which makes them dearer.

That's all well and good, but I'm not here to give you the relative merits of foolish central banks. I'm here to help you make money.

To do that, you have to ask yourself who will benefit from falling oil prices and how can you profit from it?

My favorite falling oil price plays are transportation stocks. Companies with high fixed costs in jet fuel or diesel will benefit when those costs go down, as their margins and profits will go up. It's the great teeter-totter of investing.

United Parcel (UPS) and FedEx (FDX) have already started to move. FedEx just beat on earnings, revenue, and margins. Plus, it said it was raising prices.

Other companies that benefit from falling oil prices are airlines—but I hate airlines and never buy them—as they have too much off balance sheet stuff.

My favorite companies to buy on falling oil prices are the cruise lines. Royal Caribbean (RCL) has been on fire all year.

RCL is still undervalued relative to growth, as it has a 0.72 PEG ratio and a new line of high-end ships being launched in November. Norwegian Cruise Line Holdings (NCLH) also looks solid and is just below all-time highs.

Falling oil prices also benefit Joe Six-pack. Less money in the tank means more money in the bank. And nobody ever lost money betting against the America saver.

The good news is that the retail sector has been beat up pretty good over the last two quarters. I've been buying calls on a number of retailers as bets on a strong Christmas.

Mattel, Inc. (MAT), the maker of Barbie and Hot Wheels, is on my radar. The share price has dropped 40% since the start of the year and looks like a great buy here with a P/E of 13 and a 4.30% dividend.

If I get a chart confirmation, I will buy some calls on Amazon (AMZN) as well. FedEx is saying it beat earnings in large part due to a surge in online retail traffic.

But that takes us back to the cruise lines. They will benefit from lower oil costs as well as higher consumer spending.

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