With the market realizing that air travel is making a big comeback and new catalysts suddenly emerging that could tremendously accelerate demand for flying in the next few months, now looks like a very good time to buy General Electric (NYSE:GE) stock.
GE is closely leveraged to air travel. Aviation is the company’s largest and most profitable business. And the biggest source of revenue for Aviation is the money it obtains from fixing and maintaining the plane engines it sells. Of course, planes’ engines do not require as much support when they are not utilized as often.
So with airlines grounding many of their planes due to reduced demand, the sales of company’s Aviation unit, as I noted in a previous column on GE stock, have slowed tremendously.
But in that previous article and in multiple other columns on GE and the airlines, I have noted that air travel is making a comeback. What’s changed very recently, however, is that Wall Street is finally internalizing the fact that demand for flights is jumping. Many analysts and investors are finally shaking off the pessimism caused by Warren Buffett’s decision to completely unload all of his airline stocks in early May.
The Street is also finally moving beyond the oft-repeated statement (which I always thought was completely irrational) that airline travel “will take years to recover.” After all, why would people be afraid to get on airplanes if the danger from the novel coronavirus fully or mostly disappears, due to a vaccine, treatments, herd immunity or favorable mutations?
On May 22, Barron’s reported that “airline stocks have rallied on hopes that summer travel won’t be a total wipe-out and its revival might signal a broader recovery in air traffic.” Indeed, airline stocks have climbed meaningfully in recent weeks. For example, from May 14 to June 1, Delta (NYSE:DAL) surged from $17.82 to $26.17. During the same period, Southwest (NYSE:LUV) climbed from $22.64 to $33.62.
GE stock has mostly sat out the party, climbing 95 cents to $6.76 during the period. But I think the shares will rally further as more investors realize that air travel is indeed meaningfully rebounding and that the comeback will significantly improve GE’s results.
One analyst who’s forecasting an acceleration of demand for airline tickets is Cowen’s Helane Becker. According to Barron’s, she “expects passenger traffic to hit 400,000 a day by August — up from more than 260,000 now — and one million by December.”
Wall Street has largely caught onto the idea that air travel is accelerating, driven by less fear about the virus and the reopening of economies. But the Street is still ignoring several other factors that could boost airline travel more than expected in the weeks and months ahead.
In a recent trial, Gilead’s (NASDAQ:GILD) remdesivir anti-coronavirus drug, performed much better than media reports indicate. Specifically, in an 11-day period, only two hospitalized patients with moderate cases of the virus who took the drug out of nearly 400 died.
It looks like remdesivir could potentially keep the mortality rate of hospitalized patients well below 1% and prevent all but the oldest patients and those with very bad preconditions from dying. If that’s the case, fear of the virus among 90%-95% of the population will drop tremendously, causing airline travel to likely surge a great deal. Of course, such a development would greatly benefit GE and GE stock.
Meanwhile, there are other, little-noticed factors that could make the coronavirus’ threat fall off a cliff in the next few months. The head of an Italian hospital recently said that the virus had become much weaker and not nearly as deadly in his country. And Reuters quoted him as saying that “in reality, the virus clinically no longer exists in Italy,” as the viral loads of recently infected patients had become “infintesimal” compared to those who had contracted the illness “a month or two months ago.” There’s a very good chance that a similar phenomenon will occur in the U.S. within a month.
Finally, Dr. Anthony Fauci, who’s tended to be very pessimistic about the virus’ progression, recently said that a “second wave” of the virus in the fall is “not inevitable.” Taken together, the statements by the head of the Italian hospital and Fauci suggest that the virus could be nearly gone for good by August or September. If that fabulous scenario does play out, demand for airline tickets will go through the roof as Americans run to take vacations they delayed.
Bottom Line on GE Stock
Air travel is already jumping and could easily accelerate by huge amounts in the coming weeks and months. Yet General Electric’s shares have risen only 9% in the last month. Consequently, it’s a great time to buy GE stock.
As of this writing, Larry Ramer owned shares of GE , Southwest, and Gilead. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.