Stocks are nearly in a bear market as defined by a 20% drop in prices over the last month. The 7% fall on Monday, March 9, puts it on the list of worst one-day performances along with a whole bunch that led into the Great Depression and more-recent Great Recession. The aging bull market was already in trouble because of the economic effects of the coronavirus, but now the Saudi’s have slashed prices and started an oil price war. Our question is, how can you benefit from the oil price war aside from being able to fill up your gas tank for less and paying less for heating your home?
Why Is There an Oil Price War?
Over the last several months, OPEC representatives led by Saudi Arabia have been negotiating with Russia for an agreement to cut back on production from all oil and natural gas suppliers. The idea was that this would keep prices up even as global demand fell due to the coronavirus’s effects on the global economy and on China in particular. Russia never budged. In the end, Saudi Arabia refused to cut back its own production and rather decided to ramp up production while cutting prices in an attempt to cut into Russia’s share of the oil market. Neither nation is in a particularly strong economic position these days which makes the Russian foot-dragging and Saudi decision to cut prices an economic game of “chicken.”
How Can You Benefit from the Oil Price War?
As an investor, what can you do? Oil and natural gas companies with strong economic reserves will survive, making this a good time to buy for the long term. Getting out of companies with weak balance sheets, even at a loss, may be what you need to do to avoid further investing “bloodshed” as the virus, price war, and economic downturn play out.
Vox has a few useful ideas about companies benefiting from the coronavirus.
Predicting what people will do as more and more “lock downs” occur across the world or people simply avoid going out and mixing with crowds much as possible. Netflix stock has fallen a few percent, but the stock is trading at what it sold for a year ago and substantially above last fall. The point is that that when people stay at home they get bored and having entertainment will make time go faster. Netflix and similar streaming services may do OK.
Clorox is on a tear. It is trading at an all-time high as everyone is stocking up on cleansers in advance of the arrival of the virus in their area. Companies that sell soap and cleaners, like P&G, are good ideas. P&G has slipped a bit but is now trading at its price for last July.
Even Campbell’s is doing well as people stock up on food that will last (like canned soup) during a prolonged, enforced quarantine. Campbell Soup Company is off a few percent today as we write this, but it is up about 15% since a couple of months ago and more like 60% from last year!
Sitting on Cash and Buying Later
Last August we wrote about the silent warning for investors from Warren Buffett who was accumulating cash and not buying much. His rationale was that stocks were universally overpriced and nothing met his criteria for intrinsic stock value and other reasons for investing in stock.
If you have some cash on hand, it might be an excellent time to sit on it for now as you watch for opportunities in companies with good long term potential but which are being taken down in the current rush to sell.