Lower Oil Prices an Absolute Gift to Railroad Companies
Thursday, May 24th, 2012
By Mitchell Clark, B.Comm. for Profit Confidential
The best gift we’ve gotten from the current stock market correction is lower oil prices. Oil just under $100.00 a barrel accurately reflects global fundamentals; but, around $90.00 a barrel, oil prices are oversold in my view.
Oil prices have come down significantly due to a combination of factors, all occurring about the same time. When you get situations like this (which don’t happen very often), when a number of global fundamentals come together commensurately, there’s always the opportunity for a major price move and, therefore, major profits. Lower oil prices are an absolute gift to the global economy right now. More quantitative easing from the Federal Reserve would boost the stock market more directly, but falling oil prices immediately affect the wallets of all consumers in developing and mature economies.
That’s why I’m keeping a close eye on railroad stocks right now. I love the railroad business and I love it even more when diesel prices are falling. Owning brand-name railroad stocks has proven to be highly profitable over the long term and, as a stock market sector, often ignored by Main Street investors. (See My Favorite Benchmark Stocks That Lead the Stock Market.) Perhaps the industry is just too “old world” for some. Warren Buffett liked the railroad business so much that, in 2009, his investment company purchased Burlington Northern Santa Fe railway outright. It was a great move and his timing could not have been more perfect.
During first-quarter earnings season, many railroad companies noted that they were able to increase their freight prices without affecting demand. In addition, they were able to grow their earnings despite a significant increase in diesel fuel costs, due to higher oil prices. I think this trend is going to continue going into 2013 and lower oil prices will be the icing on the earnings cake. There’s no rush in this stock market—that’s for sure; but if the stock market corrects further, I’d consider railroad stocks for new income-seeking investors.
Right now, fear and uncertainty are taking over investor sentiment in the stock market. Most of the gains since the beginning of the year have eroded significantly and, while corporations aren’t changing their tune, economic news outside of North America is weakening.
I see the stock market correcting further over the very near term with continued falling oil prices, perhaps below $90.00 a barrel. The price correction in gold and silver should also continue as the U.S. dollar outperforms its fundamentals, because of all the sovereign debt turmoil in the eurozone. As I say, there’s no need to be a buyer in this stock market—investment risk remains very high. I still weight most of my outlook towards what corporations say about their businesses. No doubt there will be continued turmoil until second-quarter earning season begins. It can’t come soon enough.
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