The Motley Fool

The Flip Side to Collapsing Oil Prices

Clearly, the collapse of oil prices has caused shockwaves in markets and big losses and uncertainty for energy companies such as Encana Corporation (TSX:ECA)(NYSE:ECA), which was just embarking on its new strategic focus on oil and gas liquids just before the price of oil began its shocking descent.

Encana is struggling and now trying to sell off assets (the DJ Bason assets) that management said just two years ago were part of the five core assets that would be focused on. It is nothing short of a disaster, and the company’s stock price clearly reflects this; it has a one-year return of -66%.

What we as investors must keep in mind is that what is bad for one segment of the market is usually good for another. Well, this morning I filled up my tank at the gas station and noticed that the price was just over $0.90 per litre. So instead of trying to predict if or when oil prices will start to recover, I think investors are better served to focus on companies that stand to benefit from the dramatic fall from grace that oil has experienced.

Retailers, for example, will benefit from the fact that consumers will have increasingly more disposable income at their disposal.

Canadian Tire Corporation Limited’s (TSX:CTC.A) goals of annualized sales growth of 3%+ at Canadian Tire, 5%+ at Mark’s, and 9%+ at FGL Sports are being helped along by a cooperating oil price environment, which is keeping more money in consumers’ pockets.

Cineplex Inc. (TSX:CGX) should benefit as well as people up their spending on entertainment and opt to visit the theatre more often. With a dividend yield of 3.36%, strong free cash flow generation, 80% of the Canadian box office, and a strong brand name that will help the company with its efforts to diversify in to different segments of the entertainment business, this company stands to reap the rewards of lower oil prices.

Next, let’s talk about companies that have fuel/energy costs that are a high percentage of operating costs. Two of the most obvious companies in this category are Air Canada and WestJet.

Not surprisingly, at Air Canada (TSX:AC), fuel is the single biggest expense. In the company’s latest reported quarter, the third quarter of 2015, aircraft fuel was a whopping 17% of revenue and represented 22% of total operating costs. So it is clear to see how the company will benefit greatly from reduced oil prices.

WestJet Airlines Ltd. (TSX:WJA) is another beneficiary of a decline in oil prices. For WestJet, fuel was 19.8% of revenue and 23.5% of its operating expense. Of the two airliners, WestJet is the better managed company, but both will benefit. In the trailing 12-month period, the company showed a profit margin of 9.7%, an ROE of 21.82%, and a dividend yield of 3.09%.

Air Canada, by contrast, reported a profit margin of 2.35%, an ROE that is negligible, and it has no dividend.

The message here is that we should focus our attention on the winners in this new reality of low oil prices.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you. Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

Fool contributor Karen Thomas owns shares of EnCana.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.