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11 Stocks for Lower Commodity Prices - 23508 views
BALTIMORE (Stockpickr) -- Markets run in cycles. Money rotates from one sector to the next as traders look to capitalize on changing trends.
We have seen this happen in the past few weeks as money has rotated quickly out of silver and into the U.S. dollar. Now money is coming out of crude oil. The next big victim will be gold. Mark my words.
This rotation out of commodities is being caused by margin hikes out of the CME Group (CME). Margins are deposits paid by traders on future contracts, and full payment is made to the exchange or clearing agency when the contract matures. The raising of margins isn’t enough of a reason on its own to make people sell their positions -- big traders have plenty of cash and aren’t going to let changes to margin requirements dictate their trades -- though it’s a great excuse that short-sellers can use to push prices lower. Rather, it's the perception of the hikes that caused the selloff.
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Big traders know the market flows in both directions, and they will jump on the opportunity to sell and profit on the downside. The margin hikes pushed the retail traders out of the commodities market. The pros knew that they would be the causality, so they used the hikes as a reason to sell positions aggressively. When large traders see an easy trade, they take it.
Now the CME has even announced margin hikes on RBOB gasoline. There’s speculation in the markets that the CME will also come after soft commodities in the coming weeks. Once the CME is done with all of its margin hikes, we will temporarily see lower prices at places such as gas stations, clothing outlets and grocery stores.
I say "temporarily" because longer-term I think commodities will go higher. Intervention into markets or central planning of markets just doesn’t work. We all saw how it didn’t work in the real estate market. Despite all of those tax breaks and loan modifications, the housing market still entered double-dip territory.
So where will Wall Street rotate money into next in the markets? It’s going to go into stocks that are tied to consumer spending because consumers will have more disposable income as prices come down at the pumps. It’s going to go into companies that will see increased spending at their retail stores since consumers will have more cash. It’s going to flow into stocks that are heavily tied to transportation and commerce, since their costs will be lower.
Here are a number of stocks that could benefit big from lower commodity prices.
Package Delivery Stocks
Two stocks that could easily see money rotate their way as gasoline prices come down are United Parcel Service (UPS) and FedEx (FDX), package delivery firms that transport goods all over the globe -- and two of TheStreet Ratings' top-rated freight services and logistics stocks. Their business models are always held hostage by the price of crude oil because it’s such big component of their overall costs. Of course, these firms hedge oil future contracts to help control their costs, but as gasoline prices come down, it will mean that consumers and businesses will be buying and shipping more goods.
From a technical standpoint, UPS is trending and consolidating right around its 50-day moving average of $73.33 a share. I would be a buyer of this stock if it holds the 50-day, and I would add to the position once it takes out some near-term overhead resistance at around $75.50 a share. If you see this stock take out $77 a share, consider that very bullish action because it would market a new 52-week high.
From a technical standpoint, shares of FedEx are currently pulling back toward its 50-day moving average of $92.29 a share. I would look to buy this stock as it trends toward that 50-day and use a stop just below that key technical level. I would add to the position once it takes out some overhead resistance at around $96.50 to $97 a share. A move above $98.52 should be considered very bullish because it will mark a new 52-week high.
Look to play these two package delivery stocks if crude oil continues to come down hard. I highly doubt that the margin hikes are over for oil with just one raise. Remember, with silver they didn’t just raise them once, they did it four times. I expect something similar to happen for crude oil.
Another stock that could benefit from lower gasoline prices is Office Depot (ODP), which showed up recently on a list of 20 Risky Retailers. The stock of this global supplier of office products and services is down around 16% so far this year.
Shares of Office Depot hit yearly highs back in January at around $6.25 a share. Since then, as crude oil prices skyrocketed the stock fell all the way down to $4 a share in April. Now the stock looks ready to take off again as oil prices and gasoline prices look poised to trend lower.
The play here is to look for increased spending by small businesses as the price of oil and gasoline come down. Small businesses are affected much more by rising commodity costs, so we could easily see spending rebound for office supplies.
From a technical standpoint, shares of Office Depot are starting to make higher lows, which is a bullish technical sign. This means traders are buying the dips at higher prices each time the stock pulls back. The stock has also started to trade above its 50-day moving average of $4.59 a share, and it’s only about 35 cents away from trading back above its 200-day moving average of $4.76 a share.
I would buy this stock once it takes out $4.76 and look for a run back toward the next significant overhead resistance level at $5.50. If it takes that price out on the upside, then we should easily test $6.25.
One stock that could rip significantly higher if consumers start spending more cash at retail outlets due to lower gas prices is Saks (SKS), another stock on the list of 20 Risky Retailers. Saks is a fashion retail organization offering a range of distinctive luxury fashion apparel, shoes, accessories, jewelry, cosmetics and gifts. Shares are up only 9% this year, so any big drop in gasoline could boost this stock big time.
It’s true that Saks' target market is the higher-end consumer, who is rarely affected by gas prices. But as gas prices come down, the middle-end consumer looking to upgrade will flock to high-end stores such as Saks. We already saw this week how great business is at department-store operator Macy’s (M) after the company raised its full-year forecast and doubled its quarterly dividend to 10 cents a share.
I expect Sakes to see the same type of gains as Macy’s did and to benefit big going forward from a drop in gasoline. The best part about Saks is that it’s a favorite target of short-sellers. The current short interest as a percentage of the float for Saks is a rather large 27.7% as of April 29. If money starts to rotate back into the retailers, then Saks could really see a huge short squeeze.
Heavily Shorted Retail Stocks
A few more heavily shorted retailers you might want to take a hard look at are Blue Nile (NILE), with short interest at 35%; Talbots (TLB), with short interest at 27.8%; and GameStop (GME), with short interest at 26.6%. All of these retail stocks could benefit big from lower gas prices. The more money American consumers have in their pockets, the more likely they are to spend -- even at specialty retailers that serve niche markets, such as Blue Nile or GameStop.
Remember, money could rotate into these names based solely off of the perception that consumers will spend more. These are trade ideas for money rotation -- not fundamental plays because I see some drastic change in the economy that will draw in higher consumer spending.
Heavily Shorted Airline Stocks
Another great way to play lower oil prices is with buying heavily shorted airline stocks. Traders love to buy airline stocks whenever oil trades lower because, just like with package delivery companies, crude oil is a huge component of airline costs. As oil prices come down, the airlines should also be in a great position to keep prices firm since overall U.S. passenger traffic remains strong, trending above 50 million passengers per month.
My ideas for this trade are JetBlue (JBLU), U.S. Airways Group (LCC), United Continental (UAL) and AMR Corporation (AMR). The current short interest as a percentage of the float for AMR stands at a rather large 17.1%. The current short interest on U.S. Airways Group is also big at 16.7%, and for JetBlue it’s 15.3%. The lowest short interest among this group is United Continental's, at around 13%. All of this short data is current as of April 29. Each of these stocks could see huge short-covering rallies if we see more big spikes down in crude oil.
My favorite plays are JetBlue and AMR because I think from current levels they have more upside if we do see a big short squeeze. Both of these stocks could easily trade up more than 50% under the right conditions. That said, I think all of these names will go up big from current levels if oil trades much lower in the short term.
Avoid Oil Stocks
Market players will also be best-served here to avoid oil stocks for a while. Many of these names have broken their 50-day moving averages and are probably going to drop more in the coming weeks. Such stocks as Exxon Mobil (XOM), ConocoPhillips (COP), Chevron (CVX) and BP (BP) look technically broken and poised for more downside. Eventually they will be buys again, but for now, avoid them. Also avoid the Oil Services Holders ETF (OIH), which has also broken its 50-day moving average.
To see more stocks that could benefit from lower commodity prices, check out the Stock Plays For Lower Commodity Prices portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a ye