REPORT: Oil Plunged 8% After the Midterms. It Bounced Back After Every Earlier Plunge This Year. Coca-Cola and Visa Don't Need It To Stay Down.
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Key Takeaways
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| By Al Qureiyeh Reviewed by: Leo Tavolaro |
If you have watched gasoline prices ease, you have probably felt a little relief. Enjoy it, but don't build your plans around it.
U.S. crude oil fell about 8% Wednesday on hopes for a deal with Iran after Democrats won Congress.
It was the fifth time since April that oil fell at least 15% in a matter of weeks.
Each of the earlier drops reversed.
You don't have to guess where oil goes next. Our own back-tests point to companies that held up whether oil fell or rose.
What Happened
The average price of regular gasoline was about $4.10 a gallon Thursday, according to AAA.
GasBuddy, which tracks pump prices nationwide, says they could keep falling in the weeks ahead.
The government's energy forecaster still expects Brent crude, the global benchmark oil price, near $105 a barrel in the fourth quarter.
That is well above where Brent settled Wednesday.
In Thursday's trading, oil rose about 2% after Axios reported that the U.S. military is preparing for a possible return to major combat.
So, the market is still trading headlines, not a signed peace.
Oil traders have been wrong about this war before: a June agreement sent oil to a three-month low.
By mid-September, U.S. crude was higher than when June began.
Our scorecard is measured against the S&P 500, the index of America's largest companies.
If you bought Ross Stores (ROST), Morgan Stanley (MS) or Microsoft (MSFT) on our late-October advice, you are ahead of the index.
The same goes for JPMorgan Chase (JPM) and SPDR Gold Shares (GLD), our Nov. 3 and Nov. 4 picks.
If you skipped Zscaler (ZS) on our Oct. 30 advice, you avoided a drop of about 9%.
We are behind on Valero (VLO), our Oct. 14 refiner pick, by about 19 percentage points.
We are also behind on Phillips 66 (PSX), our Oct. 29 pick, and Cisco (CSCO) by about 4 percentage points each.
Why the Skeptics Have a Point
Individual investors are wary: more expected stocks to fall than rise in the American Association of Individual Investors survey for the week ended Nov. 4.
First, steady companies such as Coca-Cola (KO) are popular this year, and they are no longer cheap.
Second, if a real peace deal holds, the Energy Select Sector SPDR (XLE) would likely lag.
Airlines such as Southwest (LUV), Delta (DAL) and United (UAL) could then do better than the companies we prefer.
Third, when big technology stocks such as Microsoft rally, steady companies often trail them, and both of our picks could too.
We grant these points. They are why we would own businesses that do not need any one of those outcomes to do well.
What Weiss Is Saying
Weiss rates Coca-Cola A-, a BUY, with Reward rated A+ and Risk rated B.
Weiss rates Visa (V) B+, a BUY, with Reward rated A+ and Risk rated C+.
Travelers (TRV) is A+, a BUY, and Berkshire Hathaway (BRK.B) is A-, a BUY.
Among airlines, Southwest is B-, a BUY, while Delta and United are C+, a HOLD.
The Nov. 3 Weiss piece was "Oil Plunges on Iran Talk Hopes: Why XLE Is Still a BUY."
It argued Monday's oil drop was a relief day, not a reset.
We agree that the drop may not last.
The Energy SPDR is rated B, a BUY, and it does well when oil rebounds.
We read the timing differently: we would rather own companies whose sales do not depend on oil's next move.
The Oct. 31 Weiss piece, "Healthcare and Consumer Staples Stocks Led the Market. Here Are the Winners Rated 'Buy,'" tracked money moving into steady companies.
Related story: Oil Plunges on Iran Talk Hopes: Why XLE Is Still a BUY
Related story: Healthcare and Consumer Staples Stocks Led the Market. Here Are the Winners Rated 'Buy.'
Two Companies That Held Up Both Ways
The chart shows oil climbing and falling in sharp waves since June.
In our own back-tests, we looked at the nine big oil drops and rebounds since April.
Coca-Cola and Visa each beat the S&P 500 in seven of them.
The Energy SPDR beat the index in every rebound but lagged it in every drop.
Southwest lagged the index in the months after most of the big drops we could track.
The record is evidence, not proof, and these were already strong stocks this year.
Buy the Steady Drink Maker
Buy Coca-Cola (KO), rated A-, a BUY, at the next close; it closed Wednesday at $95.80.
People buy soft drinks whether gasoline is cheap or dear, and Coca-Cola held up in both kinds of oil swing we checked.
Its unit case volume, a count of drinks sold, grew about 5% in the third quarter, and it raised its full-year outlook.
What could work against it: the company says cost pressures have accelerated, and its North American volume was flat.
Wednesday's close is about $2 below the average Wall Street target. That is a potential gain of about 2%.
That small gap is why we see Coca-Cola as a holding to keep, not a quick trade.
Coca-Cola pays $0.53 a share each quarter while you wait. At Wednesday's close, that is a yield of about 2.2% a year.
Our time frame is within a year, with the first check at its next quarterly report.
Add Visa, Which Earns a Fee on Every Card Purchase
Buy Visa (V), rated B+, a BUY, at the next close; it closed Wednesday at $436.57.
Visa earns a small fee each time a card is used, whether shoppers spend on gasoline or on everything else.
On Wednesday, card lenders such as Synchrony (SYF), Capital One (COF) and Bread Financial (BFH) fell, while Visa rose.
What could work against it: the bill to cut card swipe fees, which President Trump endorsed in January, could gain support in a Democratic Congress.
What We're Watching
First, Iran. If a deal is signed and oil stays down, we would look again at Southwest (LUV), rated B-, a BUY.
Second, Coca-Cola's next report. If North American volume turns negative, we would rethink the call and say so.
Third, the swipe-fee bill. If it moves in the new Congress, we would sell Visa, and we will tell you.
Fourth, Travelers (TRV), rated A+, a BUY. It trades above its average Wall Street target, and we would buy on a pullback toward it.
Bottom Line
Cheaper gasoline is welcome, but this year oil bounced back after every earlier plunge, and steady companies held up in both directions.
So, enjoy the relief, but buy Coca-Cola (KO), rated A-, a BUY, which closed Wednesday at $95.80, at the next close. Buy Visa (V), rated B+, a BUY, which closed Wednesday at $436.57, at the next close.
Take care,
AL Qureiyeh
