Crude prices have dropped sharply over the past year with many analysts believing that the commodity will fall further before mounting a real recovery. From about $105 per barrel last July to around $60 now – sinking in between to a 6-year low of under $44 recently – the plummeting value of oil represents a decline of more than 50% over nine months.
What’s more, in the absence of major production cuts from OPEC, the effects of booming shale supplies in North America and a stagnant European economy, we do not expect much upside in the commodity’s prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. The Iranian nuclear deal, which has the potential to release more oil in the already oversupplied market, has put the final nail in the coffin.
The question on everyone's mind is: Has the bear market for oil ended? The answer is NO if we consider the following points that typify the basic economic laws of supply and demand:
At 482.17 million barrels, current crude supplies are up 23.2% from the year-ago period and are still at the highest level during this time of the year in 80 years at least.
Despite moderating from its peak levels reached in March, domestic production continues to remain strong.
Therefore, while the direction of crude price movement is anybody's guess, the odds are firmly stacked against a sustained rally.
Benefit of Lower Oil Prices: Drop in Gasoline Prices at the Pump
The collapse in crude has markedly reduced the average price of U.S. gasoline, the most widely used petroleum product.
Gasoline prices are dependent on four factors: crude oil price, taxes, refining costs and marketing and distribution expenses. According to The Association for Convenience & Fuel Retailing, or NACS, crude oil costs account for about two-third of gasoline prices. Therefore, the worldwide demand and supply for crude oil is a major factor in deciding gasoline prices.
According to the U.S. Energy Information Administration (EIA), the U.S. weekly regular gasoline retail prices per gallon reached an average of $2.74 per gallon on May 18, 92 cents down from the same time last year. Importantly, this marked the lowest average price going into the Memorial Day weekend – the traditional start of the summer driving season – since 2009.
The ongoing slump in crude prices have seen the U.S. Energy Department cut its average pump price projections to $2.43 per gallon this year and $2.63 per gallon in 2016. To put things in perspective, gasoline prices averaged $3.36 per gallon in 2014.
The Case for Travel/Leisure Stocks
According to the American Automobile Association (AAA) and IHS Global Insight, about 37.2 million travelers were forecast to have traveled by air and road during the weekend. If the prediction is to be believed, then this Memorial Day weekend might have been the busiest in a decade, with the highest travel volume since 2005.
With the U.S. economy improving and consumer confidence increasing, more Americans are taking vacations. Further, declining gasoline prices has been an added incentive for consumers who are benefitting from a much-improved job market and rising disposable income.
3 Stocks Standing Out from the Crowd
For investors wanting to take advantage of the travel-associated landscape, we present three companies that may deserve attention. Each of them has a favorable Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).
Marriott Vacations Worldwide Corp. VAC: Shares of Marriott Vacations Worldwide – a vacation ownership company – registered growth of 16% over the past three months. The company markets and manages vacation ownership and related products under the Marriott Vacation Club and Grand Residences by Marriott brands, The Ritz-Carlton Destination Club brand and The Ritz-Carlton Residences brand. The Orlando, FL-based stock is a Zacks Rank #1 (Strong Buy) that’s surprised earnings to the upside in 3 of the last 4 quarters.
Having done a stellar job at keeping its volume per guest levels strong, analysts are predicting robust earnings growth for Marriott Vacations over the next couple of years. The 2015 Zacks Consensus Estimate is $3.47, representing 18% earnings per share growth over 2014. The 2016 forecast is $4.03, corresponding with 16% growth.
Diamond Resorts International Inc. DRII: Diamond Resorts International is engaged in the global hospitality and vacation ownership business. The company – which runs resorts in the U.S., Canada, Mexico, the Caribbean, South America, Central America, Europe, Asia, Australia, Africa and internationally – offers a vacation ownership program whereby members can buy points-based vacation ownership interests.
The Las Vegas-headquartered stock – which has gained some 30% over the past 6 months – is a Zacks Rank #2 (Buy) that’s surprised earnings to the upside in two of the last 4 quarters with an average beat of 20.89%. But more importantly, the trailing 12-month return on equity (ROE) of 28.8% – much better than its peer group average of 13.4% – speaks to Diamond Resorts’ solid management.
ClubCorp Holdings, Inc. MYCC: Involved in the leisure industry, ClubCorp Holdings has interests in golf and country clubs, business clubs, sports clubs and alumni clubs. This Zacks Rank #2 firm, whose shares have jumped 27% in the past three months, boasts of a steady organic growth, apart from adding more clubs via acquisition.
For the current year, we have seen 4 estimates moving up in the past 30 days, compared with just two downward revisions. This trend has caused the Zacks Consensus Estimate to trend higher, going from 47 cents per share a month ago to its current level of 48 cents. Additionally, ClubCorp Holdings sports a trailing 12-month return on equity (ROE) of 22.5% – against its peer group average of 16.0%.
Bottom Line
With gasoline prices expected to stay low all summer long, it’s a good time to take advantage of the abovementioned travel and leisure stocks that look set to benefit from the improving environment.
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