By Gregory Zuckerman
For most Americans, this year's sudden collapse of oil prices
appears to be unqualified good news. Oil prices have dropped 45%
since June, amid surging output from U.S. shale fields, strong
Saudi Arabian production and weak demand from Asia and elsewhere.
They dropped 12.2% just last week, closing Friday at $57.81 a
barrel. Analysts at Credit Suisse and other banks say it will take
years before oil prices return to $100-a-barrel levels.
For drivers and those who rely on oil to heat their homes,
falling crude prices act as an unexpected bonus or tax refund.
But for investors? It gets a bit more complicated. Sure, energy
stocks are taking it on the chin, as are companies that seem far
removed from the oil patch--among them debt-laden North Dakota oil
drillers, energy-service companies and junk bonds.
A Boost for Retailers
But there are also potential winners, such as retail stocks.
Last week, the Commerce Department reported that retail sales grew
0.7% in November, the sharpest rise in eight months. With gas
prices below $2.50 a gallon in many parts of the country and oil
continuing to weaken, that growth could continue. An improving
employment outlook also helps.
Not all retail sectors are benefiting. While automobiles and
parts sales are strong, as are clothing and accessories, food and
beverage, along with sporting goods, don't seem to be getting much
of an uptick.
Some analysts say the best bets are lower-end retailers like
Wal-Mart Stores, Costco Wholesale and Big Lots. Falling gas prices
provide big benefits to customers of these stores, analyst say,
because they give low-wage earners more to spend on household goods
and other items. Last month, Wal-Mart reported its first quarterly
sales increase since 2012, citing falling gasoline prices as a
factor. Big Lots, under new management since last year, also could
benefit.
Falling fuel prices could hurt Costco, one of the country's
largest fuel retailers. But analysts predict higher earnings for
the company, partly because cheaper driving makes it more appealing
to make longer shopping trips to warehouse stores such as Costco
and Wal-Mart.
Airline profits will also rise, analysts say. Fuel represents
about half of airline costs, and few are expected to pass the
savings to customers through lower fares. American Airlines shares
are up 25% in the past six months, less than Delta Air Lines's 35%
jump, and some say American is a more reasonable value.
But a growing number of analysts warn investors to beware of the
downside to falling oil prices. The energy industry, of course,
will remain under pressure as long as prices drop. Some are
adjusting their businesses. Last week, British oil giant BP said it
would cut jobs and take $1 billion in restructuring charges, and
others are trimmings spending plans.
But some investors, such as Doug Kass, author of "Doug Kass on
the Market: A Life on The Street," warn that contagion from energy
weakness can be unpredictable. "Most are underestimating the
negative consequences of oil's spill," says Mr. Kass, who worries
about energy loans from banks.
Banks exposed to energy include Oklahoma lender BOK Financial
Corp. (BOKF), which has extended 19% of its loans, by value, to
energy-related companies, according to BMO Capital Markets.
Cullen/Frost Bankers (CFR) has extended 14%, Zions Bancorp (ZION)
8% and Prosperity Bancshares (PB) 7%. Loan demand for these banks
could drop, some investors say.
Already, the junk-bond market is being crippled because 14% of
those bonds are energy-related. "If you participate in high yield
through a fund or an ETF, you have substantial exposure to energy
that probably won't be fully offset by the benefits to other
industries of lower oil prices," says Marty Fridson, chief
investment officer at Lehmann Livian Fridson Advisors, adding that
the market anticipates an "oil-patch recession in 2016."
"You can't sell just the energy portion of a high-yield mutual
fund, so you have to sell the whole thing...and that puts downward
pressure on the high-yield market as a whole," he says.
"Many think the fall in oil is good for the economy as gas
prices fall and the consumer benefits," says Douglas Rothschild,
president of PT Asset Management. "But the speed of the fall is bad
because many companies can't adjust quickly enough...leading to
layoffs, borrower defaults and trouble for the lenders."
Energy companies often hedge at least some of their oil
production at higher prices and don't face repayment of the
principal on their junk bonds for several years, suggesting there
won't be an immediate wave of bankruptcies.
Nonetheless, tumbling oil prices have "created the largest new
supply of distressed debt in a number of years...Almost overnight
there's been more than 100 stressed and distressed credits," says
Andrew Herenstein, co-founder of Monarch Alternative Capital, among
the largest investors in distressed debt.
Oh Canada
"The benefits of lower oil prices will not be evenly
distributed, and it is important to think about countries that
stand to benefit more because of higher consumption and/or less
economic dependence on oil exports," according to a report by bond
powerhouse Pimco. "The losers are oil exporters, including Norway,
for whom commodity exports are some 20% of GDP, and Russia. On the
other hand Korea, China, Japan, India and Thailand are net oil
importers and will benefit from the sharply lower prices."
The Canadian economy could get hurt if oil remains weak, because
of the country's important energy industry. That's why newsletter
writer Jared Dillian predicts weakness for Canadian Imperial Bank
of Commerce (CIBC) and Toronto-Dominion Bank (TD).
Blaze Tankersley, chief market strategist at BayCrest Partners,
says investors should be wary of manufacturer Dover (DOV), which
has seen growth in its energy segment, and General Electric (GE),
which also sells to energy companies.
Still, energy prices are just one factor in an investment
outlook and shouldn't be the sole reason to adjust a portfolio.
Falling prices can help consumers, for example, but if the housing
market's recent weakness continues it could offset some of the
benefits.
"The energy sector's effect on either market trend or earnings
is not as significant as many might perceive," says Tobias
Levkovitch, chief U.S. equity strategist at Citigroup. "While many
investors have been raising the issue of the plunge in oil prices
and its potential influence on earnings, capital spending,
employment trends, equity markets and consumer activity, reviewing
the data suggests that it is not the end all."
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
Access Investor Kit for The Toronto-Dominion Bank
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=CA8911605092
Access Investor Kit for Big Lots, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0893021032
Access Investor Kit for Costco Wholesale Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US22160K1051
Access Investor Kit for Cullen/Frost Bankers, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2298991090
Access Investor Kit for Dover Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2600031080
Access Investor Kit for General Electric Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US3696041033
Access Investor Kit for Prosperity Bancshares, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US7436061052
Access Investor Kit for Wal-Mart Stores, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US9311421039
Subscribe to WSJ: http://online.wsj.com?mod=djnwires