Far be it from me to disregard signs from the wilderness when doing research on stocks or on longer-term investment themes.
My mom asking for insidery thoughts on the probability of $5 a gallon gasoline in 2012 was the first sign. Sign No. 2 was hearing furniture maker La-Z-Boy (LZB) sound cautious on the outlook for its raw-material expenditures. Finally, sign No. 3 was another quarter from Dollar Tree (DLTR) in which the company said its already razor-thin profit margins were pinched by high fuel prices.
For the record, the last remaining three weeks of earnings reports from the third quarter have not brought any real good news regarding inflationary input costs, except for cotton (apparel, second half 2012) and steel (see Whirlpool (WHR)).
If asked whether I believe gasoline prices will hit $5 a gallon by summer 2011, my reply would be something like this: "Does it really matter?"
Here are the two key aspects I see on the discussion of gasoline prices:
- Prices by the summer are probably going to be higher than they are today (up 12% year over year, according to AAA) if the jobs recovery continues in earnest, as jobless claims data suggest.
- All the talk of $5-a-gallon gas is making people concerned today, triggering flashbacks to the wallet-busting period of mid-2010. This may begin to alter consumption patterns before gas breaks above $4.50 a gallon. The simple fact that we are having this discussion on an event that could be months away is reason enough for me to ponder how to guide you to winning ideas. (I'm looking for ideas that are outside the box -- anyone could jump on the ExxonMobil (XOM) bandwagon.)
Basic $5-a-Gallon Investment Thesis
- Retail sales, excluding autos and parts dealers, will soften, keeping with the outcome the last time gasoline prices spiked in 2010.
Green: months when gasoline prices climbed a wall.
Red: the always-mentioned "delayed impact" on spending by gas price creep.
Gold is seen as a safe haven from slower domestic growth and gets flows from equities. Note that gold prices rose about 19% from the start of the gasoline price spike to the May peak in 2010.
The investment winds have blown me toward one of the largest pawn shops in the biz: EZCorp (EZPW). Outside of the rather obvious macro thesis on EZCorp (people who live paycheck to paycheck will need cash to continue to get to work with their less-efficient vehicles -- suddenly paying 20% a month on a $120 loan seems attractive), the valuation argument (cheap) is compelling.
The company is growing its revenue and operating profits in its U.S. pawn and Mexico businesses (the latter is about to receive a boost from a recent acquisition), prior to any energy cost rise that could lead to accelerating growth rates. At 8x forward earnings and at least 15% earnings growth, EZCorp's stock interests me more than the fake Rolex being hawked in the display case.
The business has been somewhat constrained lately by the decline in gold prices (if you don't pay back your loan, EZCorp will melt down your gold watch for money), but that could change if my macro thesis pans out.
From February 2010 to the May 2010 peak in gasoline prices, EZCorp's stock plodded along, but it then took off in the second half of the year as consumers, in my view, were psychologically and financially wiped out from the spike in gas prices. The financials of the company went on to support the stock's move.