February 26, 2013
While the Fed primes the monetary pump and deliberately weakens the dollar, we're seeing the effects at the gas pump. I covered the details about the inflationary pressures that are brewing last week, and if you're wondering what you can do to combat higher gas prices and the falling dollar, here's where you can start.
The first place to look for opportunities is in refiners.
Since Christmas, the national average price of gas has risen $0.51, or over 16%, to $3.72 per gallon (according to the latest U.S. EIA data). We're now approaching levels that we last saw in September. The thing is that gas prices usually top out in the summertime, not in the early spring. So the price hike isn't caused by seasonal factors, but rather tighter supply.
Meanwhile, wholesale prices remain tame. The price for West Texas Intermediate (WTI) has fallen to a seven-week low of $91.92 per barrel. With Brent oil currently trading around $113 per barrel (the benchmark which retail gas prices are based on), refiners can make a premium of over $20 for each barrel of gas sold.
This is great news for the refiners that are going full steam. (Keep in mind that savings of just $1 per barrel can add hundreds of millions of dollars to a refiner's bottom lines.) And right now, I see that two refiners in particular are a cut above the rest: Alon USA Energy Inc. (ALJ) and Tesoro Corp. (TSO). Each of these companies are a strong buy thanks to a combination of strong institutional buying pressure (as indicated by the A-rated Quantitative Grade) and a bedrock of solid fundamentals. Let's take a look.
Alon USA Energy Inc. (ALJ) refines and markets petroleum products primarily in the south central, southwestern, and western regions of the U.S. The company operates three businesses, including refined products, asphalt products and a retail division that covers 650 convenience stores and gas stations. This quarter, analysts expect Alon USA Energy to post 173% bottom-line growth—compared with the 7.1% industry average. But it gets better: The following quarter, ALJ is headed towards 226.7% earnings growth.
Tesoro Corporation (TSO) is another independent oil refiner and marketer that operates seven refineries in six states, including one in Alaska and one in Hawaii. When Tesoro's production is at maximum capacity, the company can refine 675,000 barrels per day. The end result is gasoline, jet fuel, diesel fuel, liquid asphalt and other fuel products. Tesoro is also expected to vastly outperform the rest of the industry this quarter, with 141% forecast earnings growth. But given that analysts have hiked up their consensus estimate by 7% over the past thirty days, Tesoro Corp. could very well beat estimates. To sweeten the deal, TSO also pays a 1.5% annual dividend yield.
Over the next few weeks I'll keep my eyes peeled for other profit opportunities in commodities. The falling dollar is here to stay, so we may as well take advantage of the situation.