It seems like all investors can talk about is the collapse in oil prices.
Market commentators are split into two groups. The majority seem to think that oil has just begun a major downtrend, and that the commodity could remain weak for years. Bears point to the last time OPEC took on an increase in U.S. supply, back in the early 1980s. OPEC won, but not before the price of crude sank from $40 per barrel to a low of $10.
My contrarian nature makes me want to bet against the majority and run out and buy oil stocks. But if there’s one thing I’ve learned about buying beaten-up assets, it’s better to be a little late than to be early. At this point, I’m just not seeing any indication that oil has bottomed. It’s cheap, sure, but it could still drop further. That’s what we want to guard against.
There are certain sectors that are well known to outperform as the price of crude falls. Airlines are a big one, since the majority of their cost is in fuel. There are others that are a little less obvious, but should still see a bit of a boost from softer crude. Let’s take a closer look at three different companies that will likely benefit.
Dollarama
There are a couple of ways Dollarama Inc. (TSX: DOL) can benefit from lower oil prices.
First of all, a big part of the company’s business is moving product from being imported to the warehouse, and then to each individual store. Plus, much of the stuff it sells is made of plastic. Overall costs will go down slightly with the price of gasoline.
But the bigger benefit could be from increased business to its stores. If oil remains in a slump for long, layoffs in B.C., Alberta, and Saskatchewan could be swift and painful. Those left with jobs may be forced to take a pay cut.
As we’ve seen with dollar stores in the U.S., they tend to do well during periods of tough economic times. Folks want the same brands, but won’t want to pay full price. This is good news for a discount retailer.
Fairfax Financial
Oil has only fallen more than $40 per barrel only once in history, and that was during 2008. We all know what happened shortly after that.
I’m not sure if oil’s precipitous fall is signaling the start of another major economic catastrophe, but if it is, there is no better stock to own than Fairfax Financial Holdings Ltd. (TSX: FFH). Not only does its CEO and Chairman Prem Watsa have an unbeatable record — growing book value by 21% annually since taking over in 1985 — but the company has hedged its equity portfolio by 100%. If markets fall, Fairfax is likely to head in the opposite direction.
And remember, Watsa predicted the U.S. housing crisis, making billions betting against subprime mortgages.
Magna International
Lower oil prices will mean a break at the pumps. In certain U.S. states, the price of gasoline is projected to fall below $2 per gallon by the end of the week.
This kind of decrease is expected to give the average consumer an additional $50 or so per month in discretionary income. Considering the average age of North America’s auto fleet is more than 11 years old, look for this to be a good excuse for some consumers to finally replace their worn out ride.
This will be good news for the auto manufacturers, and for Magna International Inc. (TSX: MG)(NYSE: MGA), Canada’s largest supplier of auto parts. Magna currently trades at a very reasonable 13x P/E, has a net cash position on its balance sheet, and has bought back more than $2.4 billion of its own stock since the end of 2012. The company has come a long way since Frank Stronach used it as his personal ATM.
