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Thursday, May 29, 2008

Buy Airlines or FedEx if you Think Oil Prices Have Peaked

Oil prices fell today on inventory news that should have been very bullish. Often tops and bottoms occur when stock price action diverges with the news, like we saw today.

This article explains some methods that should profit from falling oil prices without the risk of shorting futures or even the need to open a futures account.

First, do you think Oil prices have peaked? Do you think gasoline prices peaked near Memorial Day, the traditional start of the summer driving season? Gasoline prices here in California often peak on Memorial Day.

If you answered yes, then one way to trade this belief is to buy airline stocks. The chart below shows airline stocks have fallen faster than oil prices have gone up.

The graph shows XAL (the AMEX airline index,) American Airlines (AMR), Southwest Airlines (LUV) and United (UAUA) have all fallen far more than oil prices have doubled since December 2006. To remove the specific stock risk of an airline going under, I'd buy the exchange traded fund, XAL.

Alternative Idea: Short First Solar (FSLR Key Statistics) if tight stops take you out 2% below my dashed blue support line.

If someone put a gun to my head and asked me to recommend a stock to short to take advantage of falling oil prices, it would be FLSR with an 8% stop loss and a target to cover of about $125 where it would have a PEG of 1.0 if you believe a company can grow at 45% a year for five years. A company with a $20B market cap will have a hard time growing at 45% a year without a ton of competition attacking their margins. Also, the current price already reflects near perfect execution of a very bright future. I'd look for a 50% gain (50% price decline after breaking support) for an 8% risk.

If you own solar stocks, then you may also want to put in very tight stops and consider going short if support is taken out. Some of the solar stocks are trading years ahead of fundamentals much like NASDAQ stocks were in March 2000. First Solar may have made a double top or it could find support at the 200 day moving average, but at 34 times sales, a PE of 102 and a PEG of 2.0 on a 45% growth rate, it is not cheap and would not be cheap even at half its current price of $256.

Shorting FSLR with an 8% stop loss could be safer than owning airlines. All are risky trades that nobody should attempt without using stop losses to protect you should you be wrong on the direction of oil prices.

Go long FedEx for a safer investment: Even if oil prices go down, airlines have never been a very profitable business for shareholders. You may want to own a stock like FedEx (FDX) instead.

It has been much easier to make profits transporting packages than people who may put bombs in their shoes or box cutters in their carry-on luggage. FedEx should also benefit from high oil prices in the long term as more people will shop on the internet to save driving. Even if oil prices remain high, FedEx will eventually raise prices and return to growing profits. Airlines wish they could remember what it is like to be profitable.

Not a recommendation!

I am not making a recommendation here to short FSLR or to go long airlines. This is a "how to" article for those who are looking for ideas. I believe there are "safer" ways to make money. I prefer taking my high risk with technology stocks rather than airlines that have never been good investments. My speciffic recommendations are in "Kirk Lindstrom's Investment Newsletter" where I have profited on rising oil prices with other investments like VLNC (see "Valence Technology: A Green Stock with Potential") that I've taken profits on and have stops in to protect gains already similar to what I recommended for FSLR investors who have great gains now.

Disclaimer: I am long FDX with very large gains from buying long ago when I correctly guessed it would benefit from internet commerce. FDX has corrected significantly on the economic slowdown combined with jet fuel going up faster than they can increase fuel surcharges. If oil falls in price and the economy starts to grow again, FDX would see a 33% gain just getting back to the highs it hit many times in 2006 and 2007.

To find out how I've profited greatly from these difficult market conditions, subscribe to "Kirk Lindstrom's Investment Newsletter" today!

  • Since 1/1/1999 through 5/28/08 my "explore" portfolio is up 196% while the S&P500 is only up 30% and Warren Buffett's Berkshire Hathaway is only up 83%
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