Giving households extra cash gives no guarantee they’ll spend it. But assuming that the 50 percent fall in oil prices in the last six months goes directly on consumption and given no increase in inflation, the extra household spending is going to boost consumer based economies. The US is the world's largest consumer based economy and the current collapse in oil prices is going to put about 400-450 US dollars in the average US household kitty. If that income is spent on goods and services then the US economy and the US dollar is likely to be a star performer in 2015. With this in mind, the probability of the US Fed raising rates is greater than say the European Central Bank, the Bank of England, or the Bank of Japan. For that reason the US dollar remains robust. A strong dollar and the prospect of a rate rise is likely to attract foreign capital inflows into the US, particularly from emerging market currencies, which could continue to depreciate moving forward.
With more foreign capital flowing into the US, that will increase money supply and keep borrowing costs low, which might also fuel US construction and business investment.
The latest data on US consumer spending will give us some guidance with respect to what households are doing with the extra cash from the cheaper oil. We shall soon have a clearer idea as to whether consumers are using the extra cash to spend, save more or pay off debts.
But let's assume that US Christmas retail sales are better compared with last year-to-date. We can then deduce that cheaper oil does equal more consumer spending and is ultimately a boost for the US economy. We might already know the answer to this. If we look at historic evidence, we notice that every economic boom period occurred when oil was cheap, for example during the 80s. Alternatively, recessions tended to occurre when oil prices were high. The oil price shock of the early 70s was also characterised by a sharp recession.
So based on an increase in consumer spending, which stocks are best place to take-off in 2015?
Assuming no black swan events, airline stocks are likely to have a profitable year in 2015. They gain twice from cheap oil as more customers can afford to fly and their outgoing costs are also reduced.
Airline stocks are likely to continue ‘flying high’ on the cheap oil.
So what airline stock is going to be a hot play?
United has recently been tipped by Deutsche Bank. Analyst Mike Linenberg, who predicted 2015 industry profits of $16.5 billion, up from this year's record of $12.4 billion, based on lower fuel prices, lower interest expense and modest non-fuel cost increases.
Ryanair seems also likely to be a double winner. It may not have the best reputation amongst its customers but its reputation in the City is flying high. With a significantly expanded winter schedule this year, the budget airline flew over six million passengers in December, up 20% on the year before, and a trend of increasing load factors looks set to continue. One million more tickets were sold by Ryanair in December than at the end of 2013, while the load factor - a measure of how well an airline fills its planes - jumped by 7 percentage points to 88%. It had risen in November also, alongside a 22% surge in traffic. While in October, the load factor rose by 6% and traffic grew by 5%.
Ryanair's chief marketing officer Kenny Jacobs was in an upbeat mood, thanking "our lower fares, our stronger forward booking strategy and the continuing success of our 'Always Getting Better' customer programme, which is delivering better than expected load factors in our significantly expanded winter schedule."
"New routes, increased frequencies, improving customer experience and Business Plus service," are also making a contribution.
Linenberg said his favorite small-cap name is JetBlue (JBLU). He raised his target price to $21 from $17. The only reason Linenberg did not raise his price target for Delta (DAL) is because he raised it last week to $60 from $48.
JetBlue closed Friday at $14.81, a massive 73% over the year-to-date. Delta closed Friday at $47.68, up by an equally impressive 74% year-to-date. In other words, if an investor bought 2,000 US dollars of stock in Delta at the start on 2014 their capital would have mushroomed to 3,480 US dollars.
But can airline stocks keep flying higher in 2015?
Major airline stocks are currently trading at 10.7 times their projected 2015 Earnings Per Share (EPS). Given that airlines typically trade between 10x-12x their EPS and their Enterprise value of 5.5, typically 5x – 7x, airline stock might currently represent a good entry point.
However, the key risk for the industry is fuel price volatility; every $1 per barrel move in jet fuel prices impacts industry pretax profits by $400 million, according to airline analysts.
The best performing stocks last year were airline stocks. U.S. airline stocks are the best performing sector among the 98 Dow Jones U.S. total market industry groups. The group (DJUSAR) is up 76% compared to the 8% gain in the S&P 500 and the 19% jump in the Dow Jones Transportation Index (TRAN).
Airline stocks might be an interesting sector to look at when the dust settles.
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