Goldman’s Gerald Moser outlines a long oil, short retail pair trade in his latest portfolio strategy piece. The argument is that oil stocks have underperformed both many other industries as well as the rally in oil prices. Thus they should be buoyed by oil’s strength in the upcoming quarters while stocks hurt by rising oil prices will start to feel the impact of them, particularly retail.
We have long been overweight the oil sector in our portfolio. With the recent breakthrough in oil prices, we reiterate our positive view. But increasing oil prices should start to have negative effects on other sectors as oil-related costs, such as transport and packaging, rise. Retail is among the sectors that could be affected the most. This comes at a time when other potential headwinds could weigh on the retail sector, especially general retailers. We recommend positioning for long oil vs. short retail.
Higher oil prices can of course negatively affect some sectors. Retail is one of them. There is the direct effect of higher transport, energy and packaging costs and the indirect effect, as consumers have to pay more for gasoline and hence have less to spend on other items.
There might be a valuation argument behind the trade as well. We believe the charts below encompass the firm’s global oil and retail coverage.
(Via Goldman Sachs, Strategy Expresso: Oil vs. retail, Gerald Moser, 23 April 2010)
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