What stocks will benefit most from lower oil prices (RCL)? | Intermarket Analysis

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What stocks will benefit most from lower oil prices (RCL)?

Wednesday, 03 September 2008 10:18 Intermarket Analysis

Now that our oil troubles are over (hint: I am being ironic) we can start looking at stocks that are likely to see the most immediate bottom line benefit from lower energy prices. In order to do this I will typically start by doing an internet search on a good finance portal to find a stock that has blamed lower net income on higher energy prices. Generally, a reduction in relative strength results.

The list is pretty large but it starts to deliver some interesting candidates the closer I dig. Many of these are automatically going to come from the transportation sector. This makes sense because what I am looking for are those stocks that are likely to see a direct benefit to the bottom line from falling oil prices. That is most likely to be the case when energy prices are a significant portion of total operating expenses.

Take for example Royal Caribbean Cruises (CRL) a company that markets and delivers cruise vacations. Fuel costs were shown to be equal to 15% of total ticket revenue in thier most recent quarterly report. An adjustment in fuel costs are likely to squeeze thier customers less, lower operating costs and present more opportunity to market reduced prices.

In fact, you can see that price increases in the stock starting on 7/15 (as shown in the chart below) coincide perfectly with the absolute top in crude oil futures prices. This is not a coincidence. If you are looking for a way to shift assets out of some energy stocks while they consolidate, an interesting way to diversify some of that risk is with a stock that is likely to benefit from the same thing that is making life more difficult for stocks like Conoco Phillips (COP.)

Royal Caribbean Cruises and Crude Futures prices

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This is one example of using the news to try and identify stocks that may be the most defensive in the current market environment. There are a number of ways to approach this including an option play like a covered call to hedge some risk or even a pairs trade placing a long position in RCL against a short position in a weaker performer in the same industry. If you are interested in using the news of falling oil prices and stocks that are likely to see a direct bottom line benefit from lower energy prices you could also check out the Dow Jones Transportation Index components like CSX Corp (CSX) or a transportation based ETF like the iShares Dow Jones Transportation Average Index Fund (IYT.)

How about you? Have you felt the relief of falling gas prices yet or is your SUV still for sale? What do you think?