Wal-Mart Bulls Betting on Oil to Light Up Christmas Sales.

http://www.bloomberg.com/news/2014-11-24/wal-mart-bulls-betting-on-oil-to-light-up-christmas-sales.html

As falling gas prices and growing job market afford consumers more spending cash heading into the holidays, investors are positioning for retailers like Wal-Mart Stores Inc. (WMT) to reap the benefits.

Demand for options that protect against future losses in Wal-Mart shares fell to the lowest level in more than five years relative to bullish ones, data compiled by Bloomberg show. Ownership of put options conveying the right to sell an exchange-traded fund tracking retail stocks has fallen to the lowest since May compared with calls giving the right to buy.

Investors are anticipating that the lowest crude oil prices in four years and the highest consumer confidence since 2007 will boost holiday sales for chain stores. With its focus on shoppers in lower income brackets, Wal-Mart is particularly well-positioned to thrive this holiday season, according toWalter Todd of Greenwood Capital Associates LLC.

“Wal-Mart’s customer base benefits more than anyone from the drop in gasoline,” Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates, said in a Nov. 17 phone interview. “You’re seeing confidence in the retail sector as a whole increase as gas prices fall. It makes sense that people would be inclined to be positive on the space heading into the holiday season given that backdrop.”

Shopping Season

The National Retail Federation has said holiday spending will rise 4.1 percent this year, beating last year’s 3.1 percent gain. The season is key for retailers, with sales in November and December accounting for about 19 percent of annual revenue, according to the NRF.

Retail shares have already started climbing amid a decline in crude oil prices. The SPDR Standard & Poor’s Retail ETF (XRT), which tracks the benchmark gauge’s Retail Select Industry Index, has surged 13 percent since falling to a more than four-month low in October.

Crude oil has slipped 12 percent over the same period. In addition, as of Nov. 20, the national average price of regular gas was down 23 percent from this year’s high, set on April 26, according to the American Automobile Association.

The lower gas prices “should help lower- and middle-income consumers, given the relative role of energy in consumer budgets,” a group Goldman Sachs Group Inc. analysts led by Matthew Fassler wrote in a Nov. 14 note to clients. “Wal-Mart should be a key beneficiary of this dynamic.”

‘Consumer Optimism’

We’ve seen “continued lower gas prices and higher consumer optimism,” Eric Beder, a New York-based analyst at Wunderlich Securities Inc., wrote in a Nov. 18 client note. “The imminent holiday season should compare more favorably than to last year, with a harsh winter that paralyzed much of the industry.”

Still, the holiday shopping season is highly competitive, which has led many retailers to start offering deep holiday discounts earlier than ever before, which can cut into margins, according to Beder.

Employment Numbers

Jobs data has also boosted expectations for holiday sales, according to Terry Morris of National Penn Investors Trust Co. The U.S. unemployment rate decreased to 5.8 percent in October, the lowest in six years, Labor Department figures show. In addition, 214,000 workers were added to payrolls during the month after advancing 256,000 the prior month.

“Employment numbers have certainly improved, and that bodes well for more people being able to spend more money,” Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust, said in a Nov. 17 phone interview. “There’s an optimism about the future for the consumer.”