When consumers have to spend less on gasoline, they have more disposable cash to spend elsewhere. Two groups which benefit from low oil prices are automobile manufacturing stocks and consumer goods stocks. Here are two stocks that are winners in the depressed oil price economy—and they’re both nice dividend stocks to boot.
Summing up his approach to investing, Guy Lapierre says: “I like to get paid while I wait without being too clever.” Mr. Lapierre is a vice-president and portfolio manager at Global Securities, a Vancouver-based brokerage.
“As a general principle, I buy out-of-favour dividend-paying stocks. I like consumer-driven stories,” he elaborates.
Mr. Lapierre’s view is that the fall in oil prices (or rather, its effect on gasoline prices) has added more to household budgets, meaning consumers are apt to spend more, particularly on vehicles if they can afford them.
Given low oil prices’ (and generally low commodity prices) depressing effect on our resource-based economy and the Canadian dollar, the portfolio manager is currently focused on U.S. and international companies since they are less affected by the commodity’s decline. Furthermore, rising U.S. stock prices against a falling loonie could result in further gains.
As such, Mr. Lapierre’s first ‘best buy’ pick is U.S. vehicle manufacturing stock Ford Motor Co. (NYSE─F). “The dropping price in gasoline is spurring the demand for trucks. Bluntly, Ford is trucks, trucks is Ford,” he says.
Automaker enjoys loyal following
The company already enjoys a large customer base of truck drivers who “just replace a Ford with a Ford,” Mr. Lapierre explains.
He adds that since most car buyers replace their vehicles after five or six years, many Ford owners are buying again as “part of the normal cycle”.
Meanwhile, new customers are drawn to Ford’s relatively low-mileage truck lineup. Engineering advantages in its smaller vehicles have made them more competitive against imported cars as well.
As a sign of the company’s strength and consumer appeal, the portfolio manager points out that other manufacturers have been forced to offer dealer incentives to move their motors off the lot, while Ford has not.
Mr. Lapierre also notes that some analysts had expressed worry that cutbacks in oil production and other resource extraction-related work would cause a glut of secondhand trucks to flood the market. However, he dismisses that view as a “New York-type concern”, born out of a lack of awareness about the real-world lives of work vehicles. “If you’ve ever seen a truck after it’s been in Fort Mac for a couple of years, you’d know there’s no way anyone’s going to be buying that,” he says.
What about getting paid while waiting for share prices to rise? This automobile manufacturing stock’s dividend of US$0.60 per share annually translated to an impressive yield of 4.89 per cent on recent trading prices.
Apple falls to earth–a bargain stock for now
Of course, not everyone has enough cash on hand to come home with a brand-new car. Still, the trend of people having more disposable income because they are paying less for gas holds true.
So what would someone with a few extra hundreds rather than a few extra thousands lying around want to pick up? “You’re probably buying yourself an Apple,” says the portfolio manager.
For that reason and many more, Mr. Lapierre names consumer goods stock Apple Inc. (NASDAQ─AAPL) as his second ‘best buy’.
“It’s almost a value play that happens to be the largest-capitalization company in the world,” he says. Apple stock has declined by about US$30 since last July, leaving the shares at a bargain basement stocks price too cheap to resist in the portfolio manager’s eyes.
Asked what he attributes the drop to, Mr. Lapierre says, “Our call is because it’s so widely held among hedge funds and institutional investors. Everyone’s just raising cash.”
Those large investors placed large blocks of Apple shares on the market as part of their cash-raising efforts, thereby removing the stock’s usual price floor, he continues.
Nevertheless, Apple is still a company with excellent long-term prospects and an established track record among tech stocks of delivering above the competition in terms of hardware, apps, and music. Mr. Lapierre says the price drop is easy to ignore “when you have Google paying you a billion dollars for access to your product”.
Based on the recent trading price, Apple’s annual dividend of $2.08 per share yields 2.08 per cent.
Investor’s Digest of Canada, MPL Communications Inc.
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