The continued spread of the coronavirus delta variant raises investor concerns that broader restrictions to halt the spread will once again slow economic activity. The delta threat has triggered fears about the prospects for specific market sectors. On the other hand, investors who believe the fears are overblown—as I do—can do well by buying on the dip.
As I write this, I am on a three-day trip to Napa Valley. It is very much business-as-pre-pandemic here. Even mid-week, hotels are full, and restaurants are very, very busy. I think the delta variant fears are mainly in the minds of the Washington power clique and urban dwellers. Out here in the wider U.S., people are done with coronavirus restrictions. Individuals are either vaccinated or willing to wear masks when necessary, or both.
Back to the investment theme. Hit hardest by the perceived delta dangers has been the energy sector, where stock prices have fallen across the board. After almost touching $77.00 per barrel a month ago, the price of a WTI barrel of crude has fallen into the low $60s—a 20% drop in the price of oil. And upstream producers, the drillers for oil and gas, have been hit especially hard.
However, here are a few ideas to consider, and the ETFs that can enable you to play the reversal.
The insufficient-supply-to-meet-demand trend that drove oil to $77 is still in effect. As soon as the number of COVID cases starts to drop, oil prices will move quickly higher. Also, even with west Texas crude selling for $62 to $64, these companies will be very profitable. There will be plenty of positive surprises when third-quarter earnings hit the newswires.
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is an play in the upstream recovery. For my subscribers, I dig out the best dividend-paying stocks in the group.
You might have noticed that as crude oil fell, the price of gasoline has not. The current pricing environment will be hugely profitable for the fuel refiners. These companies must buy crude oil and produce gasoline and other fuels to sell. The difference is referred to as the crack spread; the current $24 per barrel is double the profit margin for refiners versus earlier in the year.
Big-name refiners such as Phillips 66 (PSX) and Valero Energy (VLO) carry dividend yields over 5%, and their share prices will also climb with a decline in COVID cases.
I believe that Americans will not tolerate another shutdown or stay-at-home order. People are out driving their cars and taking vacations, by car and plane. Over the last couple of weeks, I have both flown and traveled by car. My observations are that people want to get back to their pre-pandemic lives, and many are already living that way.
