How to Play the Rebound in Oil Pipeline Stocks

 

By John Whitefoot

The idea of nearly one million U.S. federal employees (read: consumers) being furloughed and not getting paid has sent oil prices tumbling to a three-month low, hovering near $100.00 a barrel.

The reach of the U.S. government shutdown goes well beyond those furloughed; it also affects those who rely on government services. Permitting and leasing for oil and gas drilling is at a halt, with 81% of all employees in the Department of Interior (which encompasses the Bureau of Land Management) on furlough. (Source: Ackerman, A., “Which Government Workers Are Affected by Shutdown?,” Wall Street Journal web site, October 2, 2013.)

Investors are also fearful that even a temporary furlough will dampen an already tepid economic recovery and drive the demand for oil and gas lower. And they should be afraid, as fourth-quarter U.S. growth is projected to decline 0.2 percentage points for every week that the U.S. government shutdown continues.

But that’s only one in a number of factors that are putting pressure on oil prices. On Wednesday, U.S. commercial crude oil inventory numbers came in at 5.5 million barrels, well above the forecasted 2.4 million barrels.

On top of that, improving relations in the Middle East, the resumption of full oil production in Libya, an easing of Western sanctions on crude oil exports from Iran, and a relatively quiet U.S. hurricane season could weigh on oil prices even longer.

However, once the U.S. government shutdown is in the rearview mirror, oil prices should start to recover. But in the meantime, while oil prices are trending lower, the price of some pipeline stocks have been breaking out.

Chart courtesy of www.StockCharts.com

Over the last year and a half, pipeline stocks have been following oil prices. Between July and September, investors were indecisive and, as a result, oil and pipeline stocks traded sideways. All of that changed, though, in the middle of September.

On September 17, Magellan Midstream Partners L.P. (NYSE: MMP) and El Paso Pipeline Partners, L.P. (NYSE: EPB) touched three-month lows while oil was still spiking near a two-year high.

On September 18, the Federal Reserve said it would continue its $85.0-billion-per-month quantitative easing strategy. Since then, oil prices have slipped more than six percent, while the price of oil and gas pipeline stocks such as Midstream and El Paso reversed their downtrend, increasing more than 9.5% and 6.5%, respectively.

Investors interested in oil and gas pipeline stocks can start researching any number of energy infrastructure companies, including Atlas Energy, L.P. (NYSE: ATLS), Energy Transfer Equity, L.P. (NYSE: ETE), and Targa Resources Partners LP (NYSE: NGLS).

Since the beginning of the year, oil producers and pipelines have been performing solidly, and thanks to the Federal Reserve, oil and gas pipeline companies have been on an upswing. While any threat to the U.S. economy, like a government shutdown, will send oil prices lower, energy companies will continue to produce oil—and they’ll use the North American pipeline infrastructure to get it wherever they need to.

This article How to Play the Rebound in Oil Pipeline Stocks was originally published at Daily Gains Letter

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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The Gun Stocks Trade Is Still Firing

Popular Posts: 5 Fire-Breathing China Mutual Funds to BuyThe Gun Stocks Trade Is Still FiringForget Amazon and eBay — China Has the Hottest Online Retailers Recent Posts: The Gun Stocks Trade Is Still Firing SSO — Double Down When D.C.’s Squabbles Die Down 5 Fire-Breathing China Mutual Funds to Buy View All Posts

When you own a firearm, you want to have confidence in both your ability to use it properly in an emergency situation, and in that firearm's ability to perform without malfunctioning. Similarly, when you're at the helm of a company, you want to have confidence that your stock is going to continue to perform.

An expression of such confidence was seen today when gun-maker Smith & Wesson Holding (SWHC) announced plans to buy back up to $15 million of its stock.

In a statement accompanying the announcement, CEO and President James Debney said, "Given the strength of our balance sheet and our expected cash flow from operations, our Board has approved the repurchase of an additional $15 million of our common stock. We continue to believe that investing in our own company is presently one of our greatest opportunities."

That is the kind of confidence Wall Street likes to see from a CEO and management, so it's no surprise that SWHC stock was up nearly 2% in early Tuesday trade.

For Smith & Wesson, seeing a jump in shares is nothing new. During the past two years, SWHC stock has had an incredible run, shooting up nearly 340%. Year-to-date, the stock has seen a much more modest (yet still impressive) move higher of nearly 30%.

The gains in Smith & Wesson shares have been the result of strong revenue and earnings — metrics that have been fueled by a gun buying public fearful that the current leadership in Washington is intent on restricting gun rights. Of course, efforts to pass gun legislation in Congress were unsuccessful, but still, the threat of an impingement on Second Amendment rights caused gun lovers throughout the country to stock up on arms — and investors to pile into gun stocks.

This certainly is the case with Smith rival Sturm, Ruger & Co (RGR), as that company also has seen big jumps in revenue and EPS over the past two years. The gun-maker also has seen a big spike higher in its share price, with a two-year gain of 141%. Year to date, RGR stock actually has outpaced SWHC, rising nearly 38%.

One reason why RGR shares have outperformed SWHC is due to a correction of sorts in Smith's share price in August and early September leading up to, and immediately following, the company's second-quarter and full-year outlook revision. Despite having reported Q1 sales of $171 million, or more than a 25% year-over-year increase, and better-than-expected earnings of 40 cents per share, the stock fell on the company's tailored estimates going forward.

The reduced forecast calls for Q2 sales to in the $135 million to $140 million range, which is below expectations for sales of $143 million. EPS is estimated by Smith to come in at 20 cents to 22 cents, also below expectations for EPS of 29 cents. The company cited the implementation of a new software program and the resulting delays in production for the shortfall.

For SWHC, I suspect the August-September slide was more of a misfire than any kind of real problem for the company and the stock going forward. Apparently, the company feels that way too, hence its plan to buy back those additional shares.

I have said this in the past, but it bears repeating once again: When it comes to firearms, there is an attitudinal bid higher in the shares of both SWHC and RGR that stems from what I think is a permanent change in the mind-set of a significant segment of America. This new mind-set is, in my opinion, a justifiable fear of more federal control over our lives in general, and in particular more control over guns.

Until this attitude is altered, and until gun-makers actually see their fundamentals flounder, I will remain bullish on firearms stocks.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.