When it comes to stock picking, nothing beats the feeling of striking out on your own, going against conventional wisdom and being proved correct. It can often be quite a lonely place and the investment crowd may call you all kinds of derogatory names.
And if there is one market industry that is so unpopular and so universally hated right now that to even suggest that it can bounce back may be considered madness.
I believe you need to keep your eyes on the airlines.
The biggest and most obvious pressure right now is oil. Jet fuel has soared 50% since January alone and it doesn’t take a rocket scientist to know that this is disastrous for the long-term health of the industry. On Monday, chief executive of the International Air Transport Association (IATA), Giovanni Bisignani said, ‘The situation is desperate’ and the entire industry is ‘struggling for survival.’
Already, 24 airlines have folded since the start of the year, with Britain’s business class-only airline, Silverjet, becoming the latest victim on May 30.
The group says the airline industry’s fuel bill will soar by $40 billion this year to a total of $176 billion. If oil prices edge back towards the record of $135 a couple of weeks ago and continue to trade there, it says that would turn the industry’s $5.6 billion in profit last year into a $6.1 billion loss. However, if oil drops back to $107 a barrel, that loss would ‘only’ be $2.3 billion. But no matter what the price is, the problem is compounded by the weak economy and soaring consumer costs.
For sure, the industry is praying that oil is not just taking another temporary breather at the moment on the way to $200 (as some economists believe).
That’s the bad news. Now let’s look at the other side…
The ‘nickel and diming’ continues… but planes are still packed
Have you flown lately?
I’ve been on a plane at least once a month (and usually more) for the past year. But despite all the gloom and doom projections, I can’t remember the last time I had a vacant seat next to me. In fact, I can’t remember ever seeing many empty seats at all.
With record high oil prices squeezing profit margins, airlines are figuring out new ways to maximise revenue.
Many have imposed passenger fuel surcharges, which are increasing in line with oil prices (British Airways’ latest surcharge increase came into effect just recently – the 11th time the airline has hiked it). Some are now charging for checked bags, meals, even headsets.
While this ‘nickel and diming’ approach doesn’t make customers happy, airlines know that many folks have no other choice. Sure, they can take the train if they don’t like it – but that option is often unrealistic.
So while others may scoff, I’m going to ask whether it’s possible to profit from the airline industry…
A two-year tale of woe… but watch for ‘basing’
Take a look at the AMEX Airline Index ($XAL). In a word: Awful. And just as I expected back in September. I said in then, when the index was trading in the mid 40s:
‘I expect the index to slip back to support at $40. But with oil prices rising in what is usually a quieter period for airlines before the busy holiday season, I wouldn’t be surprised if the index breaks that support level – particularly if the broader stock market (still under some pressure) turns south. In that case, we could see a serious selloff.’
I certainly don’t suggest that you try to ‘catch a falling knife’ here. However, don’t forget that the market is a forward-looking mechanism. This means that if stocks are rising (or simply stop falling) during a recession, it’s because the market is projecting a recovery.
Keep an eye on the XAL chart. Should the index ‘base’ (stop going down and then flatline), or even reverse the downtrend and head higher, the market is likely signalling a recovery.
I wouldn’t necessarily get into airline stocks for the long term, as I believe the business model is flawed, but an intermediate-term trade seems quite reasonable once the bleeding stops.
And if you’re looking for a couple of the best individual companies (or at least ones whose charts don’t look as abysmal as their peers), check out Alaska Air Group (NYSE:ALK) and Southwest Airlines (NYSE:LUV). Keep them on your radar, as they could be early indicators for the broader sector’s recovery. At that point, you might be able to pick up some bargain basement airline stocks and turn it into a meaningful gain.
Buckle up… the seat belt sign is on
I acknowledge that this call may be a bit early, but I want you to think about it now, so that when the time comes to act, you’ll be ready to pounce and know what to do, rather than considering the idea for the first time.
But be warned: Buckle your seatbelts and make sure your seat and tray-table are in the upright and locked position. The airline outlook is likely to be turbulent for a while longer. However, once it stops, the skies may be quite friendly to your portfolio.
By Marc Lichtenfeld for the Smart Profits e-Report.