Which stocks will gain and lose if gas prices rise again?

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Key learning points

  • Lower gas prices help retailers and airline supplies, but that doesn’t mean it’s the only factor affecting them.
  • Oil and gas companies in neighboring sectors could be hurt by lower gas prices, but usually the drop should be significant. Ironically, they could also be hurt by rising gas prices due to ‘demand destruction’.
  • Gas prices affect supplies, but not as dramatically or predictably as you might think – the context around what drives gas prices matters.

You may have breathed a sigh of relief as summer gas prices started falling from all-time highs. The drop may not have been enough to inspire a road trip across the country, but every penny you can save at the pump will cut your budget in this inflationary environment.

However, how could lower gas prices affect your portfolio? Some of the companies you invest in may have lower operating costs. This can boost stock prices, but only if there are no other pressing concerns weighing on the company’s ledger. Then there are those companies that are likely to see lower expected earnings when the gas price falls, but this isn’t always the determining factor in their long-term net earnings and stock prices.

Stocks benefiting from lower gas prices

Some industries have been disproportionately hit by high gas prices and can breathe a sigh of relief when they begin to fall.

Airlines

Airlines are pre-eminently dependent on large amounts of expensive jet fuel. When fuel prices rise, some of those costs are added to the income statement. And when airlines raise prices to make up for the difference, expensive fares can cause many people to skip trips or seek alternative means of transportation.

When fuel prices were higher earlier in 2022, industry experts predicted lower quarterly earnings for exactly this reason. They weren’t wrong. The NYSE Arca Airline Index (XAL) — an index that tracks 18 different airlines — fell this year. The year started with an index value of $83.73 on January 1, 2022 and fell to a low of $53.41 on June 16, 2022.

As fuel prices began to decline in the latter part of the summer, the index began to rise again, with prices as of September 9, 2022 at $61.79.

Fuel prices affect airlines, but it’s not the only thing that affects their stock prices. Pilot shortages, ongoing flight delays and additional staff shortages due to undeniable COVID-19 rates have all contributed to the decline in the XAL in the first half of 2022. Lower fuel prices are a welcome reprieve, but do not resolve all investor concerns .

Retailers

Retailers rely heavily on logistics services to ship their products to stores across the country. For example, Target’s first quarter earnings were so bad that the stock fell abruptly from $215.28 on May 17, 2022, to $161.61 on May 18, when earnings were reported, and the company shared new inventory challenges.

In June, Target told shareholders that gas prices were a major contributor to lower profits and that the company would pass those costs on to consumers through price increases. When gas prices fall, transportation and logistics costs shrink, which can help retailers’ revenues, boosting investor confidence and stock prices.

As for Target, it hasn’t fully recovered from the massive dip in May. But after a tumultuous summer, it looks set to be heading for an equally tumultuous decline with stock prices ranging from $180.19 to $158.69, now $165.01 at closing on September 15, 2022.

Stocks losing due to lower gas prices

Other companies benefit from higher gas prices and suffer from lower ones – but only to a certain extent. Extremes can be equally harmful in one way or another.

Oil and gas companies

Oil and gas companies are interesting because they can be damaged not only by falling gas prices, but also by a phenomenon known as demand destruction.

Consumers scrap certain goods when they become unaffordable – such as gasoline. They travel less, choose public transportation more, and try to consolidate groceries when refueling the tank costs $100+. That means that when gas prices get high enough, demand decreases and pump prices drop.

This happened to Haliburton in June 2022, when stock prices fell from $42.97 to $30.04 in two weeks. It has not been restored. As of September 15, 2022, Haliburton sits at $29.40.

That doesn’t mean the company is a bad investment in the long run or that the company’s financial situation suffers. Haliburton had a strong second quarter despite the stock market dip and executives appear confident.

“Our strong performance in the second quarter demonstrates that our strategy is working well, and Halliburton’s strategic priorities are driving value,” CEO Jeff Miller said in a press release. “Total revenue grew 18% sequentially as business grew simultaneously in North America and international markets, and adjusted operating income grew 35% with strong margin performance in both divisions.”

Payment Processing Companies

Certain payment processing companies, such as Fleetcor Technologies and Wex, benefit when gas prices are high and suffer relative losses when they fall. As a branch of these companies’ businesses, they issue payment cards to truck fleets for expenses such as accommodation, tolls and – you guessed it – fuel.

According to a 2021 report from Wex, every time gas increases by $0.01, revenue follows $1.5 million. But as gas and oil companies can be damaged by the destruction of demand, so can companies like Fleetcor Technologies and Wex. As corporate fleets begin to cut back on driving hours, their use of payment cards slows down.

But that does not alter the fact that falling gas prices also have consequences for the income of these companies. In theory, this could affect their stock prices, but both companies have diversified revenue streams. Gas cards aren’t their only way to cash in.

Both companies have had a great year with strong Q2 numbers, even if share prices are below their 2021 peak. At Wex, revenue was $598 million, up 30% year-over-year. Fleetcor Technology’s second quarter 2022 figures reveal revenue of $861.3 million, up 29% from the second quarter of 2021.

How much do gas prices affect the stock market?

Increases and decreases in fuel costs rarely happen on their own. At the moment, external factors, such as the Russian invasion of Ukraine, staff shortages due to the transmission of COVID-19 and a reduction in the demand slump, suggest that the slight decline we have seen in gas prices over the past month has had minimal impact. on stock prices in general. We will see how this develops if prices continue to rise again.

Historically, fuel prices have also not necessarily been linked to the overall performance of the stock market. They can be a contributing factor, but they should be viewed as part of a much bigger economic picture.

For example, when gas prices rose during the 2008 recession, the S&P 500 simultaneously fell 49%. But during the Iran-Iraq war, the S&P 500 gained 18% despite oil prices nearly doubling. Context matters.

At the end of a global pandemic and in the midst of a geopolitical conflict, it has never been more true.

How do I protect my portfolio against volatile gas prices?

Ideally, your portfolio should be well diversified. You shouldn’t invest too much in energy stocks, but they should be a part of your portfolio.

That way you catch the highs of the oil and gas industry and don’t suffer so much from the lows. You may even be invested in renewables – a market that is likely to grow if oil and gas prices remain expensive and volatile commodities.

You could build a well-rounded portfolio yourself. You can also use Q.ai’s AI-powered investment kits and activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.

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