Oil Overreaction Yields Opportunities

The deep plunge in oil prices has been the key market theme over the past couple of months. The nearly $50-per-barrel decline has created many winners and losers in the markets. Transports such as airlines and truckers have soared, while the collapse in crude has decimated much of the exploration-and-production and energy-services companies. Retail and other consumer discretionary plays have done well on the ensuing dip in gasoline prices. The decrease in energy prices has also spread to other areas of the market, such as engineering and construction firms. Some stocks have been unfairly punished as investors have bailed out of anything connected with the oil and gas industry. The dip in these stocks has yielded good buying opportunities. Here are a couple of equities that have sold off unnecessarily. Shares of Boeing (BA) sold off some 10% last week as the Dow Jones Industrial Average posted its biggest weekly decline in over three years. The shares are now at levels the stock has bounced off several times already this year. The company continues to best rival Airbus in new orders. I have seen commentary that the oil decline might affect purchase orders eventually. I discount this as the life span of a new commercial plane is more than two decades -- is any company going to change its fleet decisions based on a three-month blip in oil markets? The oil decline makes airlines much more profitable, and may give them more confidence to upgrade their fleets. Boeing has more than $500 billion in order backlog that it will be working off for years. It feels like a good time to pick up shares in the American manufacturing icon, which is a play on the long-term growth in increasing air demand in emerging markets. One of the most irrational plunges over the last three months has been the railcar manufacturers. My pick is Greenbrier Cos. (GBX), which delivered probably the most positive conference call of any of the dozens of third-quarter transcripts I have read over the past month or two. In the words of its CEO, Greenbrier has strong tailwinds in addition to strong markets, unlike anything we have seen in recent years and perhaps the strongest in our history. The stock is down some 40% over the past three months. Although E&P companies are cutting capital expenditures, there is little doubt that domestic oil production will continue to grow in 2015, albeit at a slower rate than in previous years. The amount of oil transported via rail will also continue to grow. Credit could dry up for huge capital projects like pipelines that cost hundreds of millions, or even billions, of dollars to build. These projects also face increasing environmental opposition, which has prevented the approval of the controversial Keystone pipeline for six years. Railcars, in contrast, are relatively minor purchases at less than $200,000 apiece. More importantly, they are bought by railroads that are flush in profits or leased by manufacturers or other leasing entities. No credit concerns should apply in this space. The company has added more than $1 billion in new orders since their last quarter closed and it continues to gain market share against main competitor Trinity Industries (TRN). Less than 40% of its backlog is for oil tank-cars, demand for which will benefit from new safety standards. That means more than 150,000 tank-cars will need to be replaced or retrofitted. The company benefits from increasing domestic economic strength, which bolsters demand for cars to carry autos, chemicals and other goods. Even as the stock has plummeted, the consensus earnings estimate for next year has increased 15% over the past three months. Falling steel prices should continue to help margins, which are at record levels. Earnings are tracking to 40% year-over-year gains this fiscal year and another 20% gain or more should be in store in 2015. Given its growth prospects, Greenbrier is dirt cheap at around 8x forward earnings and shares provide a 1.4% dividend yield. Falling oil prices have rocked equity markets, so investors should take advantage of dislocations that are unwarranted.

Oil Overreaction Yields Opportunities

Take advantage of unwarranted dislocations in these two stocks.

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