Delta Air Lines
Another beneficiary of lower oil prices is Delta Air Lines (NYSE:DAL). Higher jet fuel prices in the first and second quarters of this year crushed profit margins. Ticket price increases and surcharges could not make up the difference. As a result, DAL is one of the market’s worst-performing stocks this year; shares are down 33% since the start of 2011.
Take away the expense of higher jet fuel costs, and the picture is much more positive. Planes are flying full, and the economy, while not growing strongly, still is growing. Airlines are poised to make significant profits when (and admittedly, if) oil prices moderate.
Wall Street expects Delta to make $1.11 per share in the current year. In 2012, the estimate for profit grows to $2.06 per share. You can buy that 86% growth in profits for just 7.5 times current-year estimates. That is really cheap no matter how you cut it. I would buy this stock in advance of a year-end rally.
Alcoa (NYSE:AA) kicked off the third-quarter earnings season by missing expectations. Alcoa reported a profit of 15 cents per share, while Wall Street was expecting 22 cents. A significant miss, but AA shares have held up well despite the result.
The low earnings should have been expected, as falling aluminum prices hurt Alcoa profits. The key to Alcoa is looking forward. Management was adamant about maintaining profit growth expectations for the remainder of the year. That statement helped support its current share price. And with the stock down 38% since July 1, the worst seems to already be priced into the stock.
A rally at the end of the year will occur on strong economic data. We already know automobile and airplane production are strong — and both of these are important for the aluminum business. AA shares could jump 50% before the end of the year — well ahead of Lee’s predicted 20% gain in the overall market.
As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.