A still-lukewarm U.S. economy, strong U.S. oil inventories and weakened Japanese energy demand soon may conspire to drive oil prices back down—and this presents an opportunity for transportation investors, says an equity analyst with Standard & Poor’s.
Walter Zimmermann, chief technical analyst at United-ICAP who covers a number of energy markets including crude oils and gasoline, has a slightly different tack. Oil prices are nearing a major longer-term, multi-year peak—but while oil prices are likely to peak soon if they haven’t already, Zimmerman suggests, gasoline prices stand a good chance of heading even higher.
What's the evidence that oil might be nearing a high, and why consider investment vehicles that could benefit from falling oil prices? “With oil still well over $100 a barrel, it may seem counterintuitive to look for mutual funds that have holdings in transportation stocks, since these are the companies normally most hurt by high and rising oil prices. However, oil prices are not likely to rise forever, and could be near a correction,” wrote S&P transportation analyst Jim Corridore (left) in a “Trends & Ideas” comment on Monday.
The U.S. Energy Information Administration reported that U.S. commercial crude oil inventories as of April 8 stood at 359.3 million barrels, above the upper limit of the average historical inventory range for this time of year. In addition, inventory levels are above where they stood this time last year, when oil prices were much lower, Corridore argued, saying: “We think that these statistics could support a drop in oil prices from where they are now.”
Using S&P's MarketScope Advisor website to screen domestic equity mutual funds with a four- or five-star S&P ranking with high exposure to top holdings in the transportation sector, Corridore pinpointed three mutual funds as good buys. All are still open to new investors and had at least two transportation names in their top 10 holdings.
1) Aston/River Road Dividend All Cap Value Fund (ARDEX) Five-star-rated ARDEX, focused on dividends and value, “might seem a strange place for transportation stocks,” Corridore wrote. However, he added, UnitedParcel Service and Norfolk Southern were both in the fund's recent top 10 holdings, and both pay a dividend. Some of ARDEX's other top 10 holdings are Waste Management, Automatic Data Processing and General Mills (GIS 37 *****). “We think this is a more rounded fund than the other two…but would likely still see a benefit if oil prices decline.”
2) Fidelity Select Transportation Portfolio (FSRFX) FSRFX is ranked four stars by S&P and focuses on the transportation industry. The fund's