Likely Reduced Prices For Oil Could Help Keep Airline Stocks Aloft by John Dorfman, Dorfman Value Investments
Oscar Munoz, CEO of United Continental Holdings Inc. (UAL), had a heart attack in October. He came back to work in March and in April bought $1 million of UAL stock.
Munoz had lots of company. A dozen UAL executives bought shares in April. That raises the question of whether this is a good time to be in airline stocks.
For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
It’s always a difficult question. Two of my role models in the securities business, Sir John Templeton and David Dreman, confided that they had lost money in airline stocks more often than they had made money. Financier Warren Buffett once called airline stocks a “death trap” for investors.
So when I hold airline shares, I’m always nervous. I started buying Alaska Air Group Inc. (ALK) for most of my clients in September 2014. Two months later, I added shares of Delta Air Lines Inc. (DAL).
From roughly mid-2014 through January 2016, airlines had the wind at their backs. They benefited from industry consolidation (which makes their planes fly fuller) and from a huge drop in the price of oil, and hence jet fuel.
Oil prices dropped from more than $100 a barrel in mid-2014 to a trough of about $29 in January 2016. Now they are back up to about $49, turning a tailwind into a headwind.
Accompanying is a little scorecard on how six major airline stocks have done, compared to the Standard & Poor’s 500 Index.
As you see, all the airlines except American did great while oil prices were falling fast. And all except Southwest have declined sharply as oil prices turned up.
My best guess is that oil will kick around in the $40 to $70 per barrel range for the next year or two. So the quick-reflex gains from falling energy prices are probably over.
Most of the gains from industry consolidation have probably already occurred as well. The industry has consolidated to six major airlines from 11 about a decade ago. I don’t think federal antitrust authorities would look kindly on further mergers, no matter who is elected president in November.
So should you go opposite the UAL executives, and dump airline shares? I’d say no. There are some reasons to stick around.
Investors are not used to seeing strong profits from airlines, and so the shares never rose to euphoric levels. Right now, shares in Alaska Air go for nine times earnings. American’s multiple is three; Delta Air, seven; JetBlue, eight; Southwest, 12; and UAL, a little more than two.
Given the airlines’ historic tendency to shoot themselves in the foot, it might be wise to cash in now on a portion of gains you have earned in the airlines the past couple of years. But I wouldn’t abandon the group totally. The airlines still have attractive valuations and strong profits.
Refiners resemble airlines in certain respects. When the price of oil drops, the raw material cost for refiners declines.
However, refiners are still part of the energy sector. When the sector loses favor, the “good girls” in the refinery space get thrown into the paddy wagon with the “bad girls” from the exploration and production side.
A mild winter and a meaningful decline in the price of gasoline have hurt refiners, too. Shares of Tesoro Corp. (TSO), a major refiner, have fallen from about $117 in November to about $80 now.
Against this backdrop, three Tesoro insiders, including Chief Financial Officer Steven Sterin, bought shares in May. Sterin was also a buyer in February.
Tesoro stock is trading for about seven times recent earnings, and I view the shares favorably.
Since the beginning of 1999, I’ve written 32 columns on stocks displaying insider buying or selling. One-year returns can be calculated for 28 of them.
The stocks I recommended based on insider buying have beaten the Standard & Poor’s 500 Index by an average of 6.7 percentage points in the 12 months following publication. Those where I noted insider selling have trailed the S&P by a small fraction of a percentage point.
Disclosure: I own Alaska Air and Delta for most clients and personally. I own JetBlue for one client. In the refining industry, I don’t own Tesoro but do own rival Valero Energy Corp. (VLO).
Airline Stocks – Scorecard
Airline Return June 30, ’14 – Feb. 28, ’16 Return Feb. 28-June 3, ’16
American Airlines Group AAL -3% -25%
Alaska Air Group ALK 57% -13%
Delta Air Lines DAL 26% -13%
JetBlue Airways JBLU 106% -20%
Southwest Airlines LUV 59% -1%
United Continental Holdings UAL 38% -22%
S&P 500 Index 3% 8%