oil prices are here to stay. With Iranian oil production due to start hitting the global market upon the completion of the nuclear agreement, the already huge supply glut only looks to be getting worse. Crude prices spent July in freefall, and kept declining into early August, with TWI nearing $45 a barrel, and Brent under $50.
Anyone expecting the Saudis to suddenly lose their resolve and close off the spigot may want to rethink things. They appear more than committed to breaking their North American competition.
However, any good investor knows that with great risk and chance can also come great opportunity. Sustained crude prices at or below $50 should ripple across the economy with a wide variety of consequences…and not all of them are necessarily bad. We’ve already explored how well-hedged small-cap oil and gas companies might be better protected in these difficult times. And major oil and gas companies like Chevron (CVX) and Exxon (XOM) are showing dramatic reductions in profits.
However, sometimes it pays to look a bit deeper. Low oil prices are going to hammer companies that rely on selling oil for their bottom line, but there are plenty of companies where oil is a major cost. Low oil prices may mean contraction in one part of our economy, but for plenty of industries, they’re a boon.
Thinking Outside the Pump
One method for playing oil’s slide could be finding small-cap companies within industries that have a strong negative correlation with oil prices. By identifying the industries that are likely to see lower costs or higher demand because of low oil prices, we can find the opportunities that we’re looking for.
The site AlphaBetaWorks Insights explored this idea almost a year ago, with an article that looked for the clearest correlation between low oil prices and success in the equity market. In the piece, they found that certain industries showed a particularly strong correlation.
And, in most cases, the work passed the smell test. The macroeconomic link between the industries and oil prices is typically relatively clear. So, we looked at which small-cap companies within those industries had the best average analyst recommendation.
The AlphaBetaWorks article found this to be the strongest correlation. At first, it may not seem like the most obvious correlation. However, the sort of broad exposure to the economy that comes from owning parts of retail and industrial locations can mean that more money in the hands of American consumers is going to create real returns. With less money going to filling up gas tanks, there’s more to be spent on the businesses located within strip malls, or more money to sink into your own business.
The following are those small-cap REITs that feature relatively strong reviews from analysts.
Wheeler Real Estate Investment Trust (WHLR)
American Assets Trust (AAT)
Southerly Hotels (SOHO)
Rexford Industrial Realty Trust (REXR)
Terreno Realty Corporation (TRNO)
Gladstone Commercial Corporation (GOOD)
Farmland Partners ($FPI)
Armada Hoffler Properties (AHH)
Airlines and Freight
Investing in airlines is obviously a pretty dicey prospect. One could be forgiven for simply ignoring the entire industry, given its razor-thin margins and history of disappointing returns for investors. However, if you’re looking for industries that have the most direct exposure to oil costs, airlines are easily near the top. Fuel costs represent a significant portion of expenses for any given flight, making rock-bottom prices for crude a financial boon for companies involving air travel.
It may not be a surprise that only one small-cap airline is viewed favorably by analysts, but we’ve also included one company engaged in air delivery and freight, an industry with similar exposure to fuel costs.
Republic Airways Holding (RJET)
Air Delivery & Freight
Air T (AIRT)
Casinos, Gaming, Resorts, and Cruises
Anyone who enjoys investing in small-cap stocks is likely someone who knows a thing or two about gambling. So, much the way investors with strong portfolios are more likely to be willing to roll the dice on some more speculative stock picks, consumers with more money to spend are likely to be more willing to roll the dice on, well…rolling the dice.
Much like REITs, lower oil prices should put money in the hands of people who will then be able to spend it elsewhere. And one place people are more likely to spend money if they’re flush with cash is on entertainment and vacations. As such, companies operating locations like hotel/casinos could reasonably expect a bump in interest in their services if oil prices remain suppressed for an extended period.
Casino stocks tend to be dominated by a few major players, but there are still some small-cap alternatives out there that are healthy enough to get relatively good marks from analysts.
Century Casinos (CNTY)
Full House Resorts (FLL)
Golden Entertainment ($GDEN)
There’s also one somewhat tangential play to consider in casino equipment. If, in fact, the gaming business is due for an uptick, that fact could reasonably be expected to improve business for the companies making their table games.
Gaming Partners International Corp. (GPIC)
Are Small Caps Worth the Risk?
Small-cap companies are usually a riskier play than their mid- and large-cap brethren because their size makes them more susceptible to changes in fortune. However, that may also mean that the relative benefits of good fortune can be greater. For smaller companies, the benefits to the bottom line provided by lower costs, or an increase in demand, can be multiplied.
When looking for ways to play lower oil prices, sticking to well-known names can just as easily limit the degree to which you can reap the benefits. Digging into the small- and micro-cap market is frequently going to provide better opportunities for returns at a better value than more well-known companies.
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