Oil prices may have had an up day on Wednesday but they have been plunging over the last four months. For investors in one sector, lower oil prices may be good news for their portfolios.
The Dow Jones transportation average has been hitting record highs this week. And for the year, the index is up almost 18 percent while oil is down 16 percent.
With oil expected to face continued pressure, the “transports” may look like a screaming buy. But one market watcher says investors should be careful with which type of transportation stock to buy.
“Lower oil prices are great for airlines—not as good for the road and rails,” said Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Markets Intelligence.
Gibbs, who has more than $13 billion in assets under advisory, cites airlines’ exposure to oil prices as a reason why the subsector looks better with a fall in oil.
“For airlines, jet fuel is about 30 percent of their operating costs,” she said. “U.S. airlines don’t really hedge. In fact some companies don’t hedge oil prices at all. So a further decline—or even just keeping these prices low—is really good for airlines.”
On the other hand, rail and road companies in the U.S. could suffer if oil prices fall even further. That’s because they transport a lot of the oil drilled domestically. Should prices go below $75 per barrel, oil fracking companies will start to reconsider their production, predicts Gibbs.
“This is one of those times where it’s a good point to really delve down,” she said. “Great for the airlines, not so great for the road and rails.”
Meanwhile, the technicals are generally favorable to the Dow Jones transportation average, according to Steven Pytlar, chief equity strategist at Prime Executions.
“What we see is an ongoing uptrend,” Pytlar said, looking at an 18-month chart of the index. “It had been threatened during the October selloff along with the broader market but then snapped back very quickly. We call that a false breakdown. It’s generally a very positive signal.”
A false breakdown indicates investors who are inclined toward the sector are buying back it back after selling off their initial positions. “Usually when we see something like this in a sector that has been outperforming the broader market and other sectors,” Pytlar said, “it’s a positive indicator that buying demand remains strong [and] that the prior trends that have been driving that trend remain intact.”
“Technically it looks like it continues to move higher,” he added.