When Gas drops like this, Wal-Mart (WMT) goes up

“I’m gonna teach you to hate spending money. I’m gonna make you so sick of spending money that the mere sight of it will make you wanna throw up!” — Rupert Horn in: Brewster’s Millions (1985)

We are nearing a point with the current plunge in Crude Oil prices, where we have only seen three instances over the past 40 years where prices have continued to fall from here: 1984, 1986 and 1993. In none of the three is Crude down more than 9%, and 83% of the time (29 similar historical instances) Crude has been up in the next three months.

This has been a 6 month blood bath for the Energy sector, but Retail stocks have been hot and especially over the past couple of months. Even with the pull back over the last week, Consumer Cyclical Stocks (Morningstar $MSCC) are up 14% since the markets paused in mid-October, almost doubling up the return of S&P 500. The broad market may be trying to digest the impact of this incredible drop in Crude and Gas prices, but Retail Stocks are loving it.

With gas prices continuing to drop at the pump, and consumers having more dollars in their wallets, who is likely to be a big beneficiary? We decided to do a narrow study on Wal-Mart.

First though, to capture the most similar instances of this environment with energy prices historically, you can’t just find times where Gasoline is down 48% in 6 months. What if Gas dropped 48% 6 months ago and had been flat since that time? This is a different analog in most investors’ minds from what we’ve seen today and therefore is not a good comp. EidoSearch generates projections based on finding similar historical comps, and we have validated that the trajectory and path of these moves matters!

To further narrow in on a compelling study, we decided to look at Gasoline Prices (RBOB) AND at the trading in Wal-Mart over the past 6 months. Meaning, we used the Multi-Dimensional capabilities of our tech to look at times historically where both Gas prices and the price of Wal-Mart’s stock have traded in a statistically similar fashion as they have to today. What typically happens next?

Wal-Mart typically performs well in times like these.

· We found 8 similar instances historically where both Wal-Mart and Gasoline have traded in a similar fashion as to today. The oldest occurrence being from 1986.
· Wal-Mart is up in 7 of those 8 instances, and the average return of WMT in the next 3 months is 9.2%
· As you can see, Gasoline prices are also typically up in the next 3 months as well, so it seems to take a bit of time to dampen the consumer’s enthusiasm

Have a great week!