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9 stocks that lose at the gas pump
Every penny in the tank is a penny that doesn't go to a retailer or restaurant. With prices expected to reach $3 some places, the pain has only just begun. Plus, 5 stocks that win.
By Michael Brush
That pain you feel at the pump each time you fill up the tank may soon spread to your stock portfolio if you dont watch out.
Sure, maybe you can grin and bear it each time you shell out a little more, now that gasoline has hit $1.76 per gallon on average across the country -- and as much as $2.75 in some locales on the West Coast.
We'll get to some stock-picking (or selling) suggestions down below. But as you think about the potential impact on your investment portfolio, consider these details:- Every penny increase in the price of gasoline sops up at least $1 billion in annual consumer spending -- money that could have been spent on other things. So far, the average price of gasoline is up around 28 cents per gallon nationwide this year.
- Higher prices at the pump have already drained more than $20 billion of the $40 billion tax refund being counted on to spur consumer spending this year, says David Rosenberg, Merrill Lynch chief economist for North America.
- Gasoline prices are very likely to go higher before they go lower. Look for the worst prices during the peak-driving season, from Memorial Day to the Fourth of July.
I dont think there is any question we will see at least $3 gasoline on the West Coast and parts of the East Coast, predicts Tom Petrie, chairman and chief executive of Petrie Parkman & Co., a Denver investment bank that specializes in the energy sector. He thinks the price could reach as high as $3.25. And well see pretty high prices everywhere else, by historic standards.
Prices will back off in the autumn, the experts believe. But they wont return to what we've considered normal, for three reasons:
- The Organization of the Petroleum Exporting Countries (OPEC) is cutting back on production, tightening supply.
- Energy reserves worldwide are maturing.
- New limits recently kicked in on sulfur levels and the use of the octane enhancer Methyl Tertiary Butyl Ether (MTBE) in gasoline.
That means gasoline is more complex and expensive to refine, and there is less refining capacity available, says Charles Maxwell, an energy analyst with Weeden & Co.
Related news and commentary on MSN Money
The bottom line for the stock market: Higher energy costs already are walloping the airlines and are likely to damage low-end retailers and restaurants. But not all sectors will do badly. Once the damage to these groups becomes apparent, investors may well shift money to more defensive names in areas like health care and consumer staples.
Heres a closer look at some likely losers and winners.
Low-end retailers
If youre making a six-figure salary, you probably dont think much about the extra money you now shell out for gasoline. But with the typical after-tax income for U.S. families at $37,000, you can bet the added costs are taking a bite out of family budgets everywhere. Whats worse, higher gasoline prices come at a time when real wage growth has turned negative for the first time since 1995. Its no wonder that 40% of those polled in a recent CNN/Money survey said the surge in gas prices was having a major economic impact.
The higher prices at the pump wont have much of an impact at the glitzy retailers with strong growth trends, like Coach (COH, news, msgs) or Tiffany (TIF, news, msgs). But expect damage at discount retailers like Dollar General (DG, news, msgs) and Family Dollar Stores (FDO, news, msgs), says Carl Wiese, a money manager at Wall Street Associates in La Jolla, Calif. Family Dollar is down 20.5% since the end of October. Wal-Mart (WMT, news, msgs) fits that negative bill, too.
Bottom line: Sell discount retailers like Dollar General and Family Dollar Stores.
Cheapest restaurants will suffer most
Fast food restaurant chains such as McDonald's (MCD, news, msgs), Wendys International (WEN, news, msgs) and Jack in the Box (JBX, news, msgs) have enjoyed a great year so far. Theyre getting more traffic. People are spending more on average, thanks to pricier offerings like the McGriddle breakfast sandwiches at McDonald's and chicken strips at Wendy's.
The companies are taking share from a struggling Burger King, and their stocks are higher: about 35% at Jack in the Box, 18% at McDonalds and 7% at Wendys.
But sales will start slumping as gasoline prices keep rising.
Heres the problem. While casual dining restaurants such as Applebee's International (APPB, news, msgs) will come through relatively unscathed because they cater to older restaurant goers with more money, fast food restaurants will get hurt because they count young males among their biggest customers. These customers have less money. So, as they spend more on gasoline, theyll be buying fewer fries.
Meantime, the fast-food chains are being hit with higher prices for basic ingredients such as meat and cheese -- both up as much as 90%, says Bear Stearns restaurant analyst Joseph Buckley. Whats more, heavy discounting was phased out around this time last year, so year-over-year comparisons will soon start to be harder to finesse.
Not all is lost for the fast-food set, especially the global players. Buckley thinks the stocks of McDonalds and Yum! Brands (YUM, news, msgs), which runs KFC, Pizza Hut and Taco Bell, may get a reprieve of sorts because of their international presence.
Bottom line: Sell fast-food chains like Wendys, Jack in the Box and AFC Enterprises (AFCE, news, msgs), which runs Popeyes Chicken & Biscuits and Church's Chicken.
Airlines without hedged fuel costs are in trouble
Analysts at Merrill Lynch calculate that for every $1 increase in the price of crude oil, the airline industry gets nicked for another $500 million in annual pretax profits. With the recent spike in oil, Merrill airline analyst Michael Linenberg now thinks the carriers will lose $2.2 billion in 2004 before taxes. That's more than triple his prior estimated loss for the industry of some $600 million. Whats worse, many airlines are not hedged against higher fuel costs, and, for the most part, they cant raise fares to offset the damage.
The worst off would be the major carriers such as United Airlines parent UAL (UALAQ, news, msgs), Delta Air Lines (DAL, news, msgs), AMR Corp. (AMR, news, msgs) (the parent of American Airlines), Continental (CAL, news, msgs) and Northwest (NWAC, news, msgs). Not only are they the least hedged against higher fuel costs, theyre also being hit by competition from lower-cost carriers like Frontier (FRNT, news, msgs), JetBlue (JBLU, news, msgs), AirTran (AAI, news, msgs) and Southwest (LUV, news, msgs). Tellingly, all of these airlines have significant hedges against higher fuel costs.
Bottom line: Sell major airlines United, AMR, Continental and Northwest. You can keep a "hold" on Southwest, especially because of its fuel-cost hedging bets.
You can't put off health care, drugs and food
When people are forced to be selective about how they spend, some of the best stocks to own are those offering necessities that people have to buy no matter what. In times like these, investors tend to gravitate to such names as these for safety. Top sectors on the list: health care and food.
Beaten-down pharmaceutical companies such as Merck (MRK, news, msgs) and Bristol-Myers Squibb (BMY, news, msgs) now look like attractive plays. They have been accumulated recently by leading value investors such as John Buckingham, whose Al Frank fund (VALUX) was up 90% last year. But there are intriguing smaller cap prospects in health care, as well.
Tom Bishop, whose stock picks in his BI Research newsletter have returned about 14.5% annualized over the past decade, suggests SFBC International (SFCC, news, msgs). The company helps the major drug companies carry out drug trials and deal with the paperwork needed for drug approval. The company is growing 15% to 20% organically, and periodically it makes accretive acquisitions, Bishop says. The stock has been in a holding pattern since December, when it issued new shares to make another purchase. But it could break out soon. All they have to do is announce a decent acquisition, says Bishop.
Next, insiders at Orthodontic Centers of America (OCA, news, msgs) snapped up over $1.7 million worth of their companys shares in the $7.40 range in March, according to Thomson Financial. The company provides back-office support for dentists. Its shares have been held back because of concerns about collections and a lawsuit by dentists who want to break off with Orthodontic Centers. The huge insider purchasing last month suggests both of these concerns will be resolved. They are the strongest competitor doing the administrative work for dentists, says Ron Muhlenkamp of the Muhlenkamp fund (MUHLX), which holds Orthodontic Centers shares. Theres a huge short position in the stock -- 21 million shares out of 50 million. But thats a positive because it puts a floor under the stock; all those shorts will have to buy shares to cover positions at some point.
In food, Archer Daniels Midland (ADM, news, msgs) is an unusually solid play on the high cost of energy. First, it is one of the worlds biggest food processors, churning out things we use every day like wheat, flour, corn syrup, cocoa and soybean products. But it is also the largest producer of ethanol. This additive helps gasoline burn more cleanly and is rapidly replacing MTBE in gasoline production. The stock was recently added to the buy lists at Value Line Investment Survey and Buckinghams Prudent Speculator, newsletters with some of the best records over the long run.
Bottom line: Buy Merck, Bristol-Myers Squibb, SFBC International, Orthodontic Centers of America and Archer Daniels Midland.
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