Cheap Oil Prices Don’t Just Benefit the Consumer by Chad Shoop, The Sovereign Investor

Crude oil prices have taken a beating over the past several months. A barrel of oil plunged from above $100 a barrel in June to approximately $55 today. What’s more, oil’s drop has sent shockwaves throughout the market. Not only have oil stocks been hammered, but the alternative energy sector and battery-powered car maker Tesla Motors Inc (NASDAQ:TSLA) have been crushed as well.

Needless to say, oil prices have impacted a much broader spectrum than just oil exploration companies.

But there are some groups poised to take advantage of the temporary drop in oil prices. That’s why I have an opportunity for you today to reap a near 200% gain in the next four months based on the impacts of lower oil …

Areas such as consumer goods and airlines have seen shares rally more than 20% since the summer, while the S&P 500 has notched a mere 2.6% gain. Why? Simply, cheap oil prices help the bottom-line of many companies. If people are spending less money at the pump, then they are going to be more willing to spend their money in stores. And as for transportation and trucking companies, cheaper gas means stronger margins.

Specifically, I like FedEx Corporation (NYSE:FDX) over the coming quarters. The delivery and logistics company gets packages where they need to be all around the globe. In an age of heavy shopping via the Internet, that service is in high demand.

Not surprisingly, oil is a major contributor to the company’s costs. Indeed the company has hedges on its oil to keep its fuel costs under control, but even after taking the loss on its hedges, the delivery firm still should reap hundreds of millions in savings from lower oil.

Analysts have already attempted to price some of this effect into the stock. It’s why shares are up 14% in the last three months.

But I believe FedEx has just started to rally from crude oil prices.

Benefiting From Both Sides

One of the primary beneficiaries from lower oil is the consumer. And with lower oil prices at the pump just in time for the holiday season, freight companies such as FedEx and UPS are preparing for their busiest days ever.

Economist have estimated that lower oil can save the average American family about $750 a year — money that will largely be pumped back into the economy. It’s the equivalent to a $75 million stimulus package for the middle class.

If consumers spend a portion of that on household items, gadgets and other goods, FedEx is going to see a rise in shipping demand across the country. As a result, its services will enjoy above-normal demand. At the same time, FedEx is seeing savings of a few hundred million dollars with lower gas prices.

These two effects create an excellent opportunity for FedEx to have two fantastic back-to-back quarters.

FedEx’s 2015 second quarter stretches from September to November. When the quarter began, the national average price for a gallon of gas was about $3.40 — today it sits under $2.60. Its next quarter will run from December to February, capturing the heart of the holiday season and what will likely be a trough in gas prices — meaning that they could start to rebound as we head into spring.

An Opportunity for a 190% Return on Investment

The company releases earnings on Wednesday, December 17, before the bell. Given all the tailwinds at its back, I believe FedEx will see a windfall in profits in this quarter and the next.

There are two easy ways to play this trend.

The most straightforward way is to purchase shares of the company, which currently trades about $175 — not exactly cheap in terms of cash outlay. To purchase 100 shares of FedEx, it would cost you $17,500.

But, you could also use options, and control a significant number of shares for a fraction of the price while also generating a much larger return. One option contract controls 100 shares of the underlying company. The option I am looking at currently prices at $1,100 to control the same 100 shares of FedEx.

To capitalize on the two strong quarters ahead, you will want to purchase a call option that expires April 17. I would purchase the $175-strike option — option symbol in Yahoo is FDX150417C00175000. To hit breakeven by April, you just need the stock price to rise more than 6.8%.

But I believe the stock price for FedEx could climb 20% over that time frame, which would hand us about a 190% gain using the option.

Increased demand from the consumer wealth effect, hundreds of millions in gas savings and consumer sentiment hitting an eight-year high, FedEx should see a boost to its share price.

We are positioned for a 190% gain in the option over the next four months thanks in a large part to falling oil prices.

Regards,

Chad Shoop
Editor, Pure Income

Cheap Oil Prices Don't Just Benefit the Consumer