While corporate earnings continue to come in solid, stocks continue to be sold.
It’s not all the time that stocks follow oil prices, but they certainly have this time around and the selling momentum has gained on deflationary pressures from producer prices to declining expectations for global economic growth.
And the selling is happening to companies that beat consensus with their earnings, like J.B. Hunt Transport Services, Inc. (JBHT), which beat Wall Street estimates for sales and earnings in what was a very solid quarter for the trucking company.
For J.B. Hunt, sentiment just wasn’t strong enough to carry the stock materially higher, even in the face of declining prices for diesel fuel, which is a big bonus for that company’s bottom-line.
The autumn sell-off also flies in the face of reduced pressure on the Federal Reserve to begin raising rates as recent data shows a softening of economic activity on a global basis.
If oil was the catalyst and economic data the accelerator, it’s important to remember where stocks have come from. The equity market has been due for a material correction for a number of quarters. It didn’t even need a reason for a correction only because share prices have come so far over the last several years.
The breakdown in oil prices has been truly spectacular and is now seriously affecting the business case for many energy producers.
And the breakdown isn’t just due to increasing domestic production; it’s a breakdown in sentiment based on declining expectations for the global economy.
So stocks have sold off and they may go further, but a five to 10% price correction from the all-time record high is perfectly normal. And since stocks have been trending consistently higher for the last two years straight, what’s transpired in recent weeks is what I believe to be healthy for the longer-run trend.
In this environment, the guide for equity investors should continue to be what corporations report about their businesses.
Especially among dividend-paying large-caps, balance sheets are in great shape and the cost of capital remains low. Top-line growth is mostly single-digit, but for a number of quarters now, corporations have been able to raise their prices without affecting demand and this goes right to the bottom line.
With dramatic price action comes opportunity. With oil prices so significantly lower, it’s time for investors to consider the oil and gas sector for investment-grade opportunities.
With the momentous reorganization taking place among the Kinder Morgan Energy Partners, L.P. (KMP) group of companies, long-term, income-seeking investors can now put this company on their radar.
Regardless of the price of oil or natural gas, the product has to be transported, processed, and stored. And the price of oil while being transported, in a lot of cases, has nothing to do with the cost of transportation; pipelines typically benefit from long-term contracts.
This is why a large oil and gas company with significant pipeline and storage capability is now a noteworthy opportunity.