Everywhere you look, the market has been climbing. However, not all growth is rooted in fundamentals. How long will the gambles pay off?
One week … nearly 100% gains on your money …
American Airlines investors — scratch that, American Airlines gamblers — saw their well-timed speculation soar 93% from the beginning of the month through Monday’s trading session.
The stock began taking off last Thursday — jumping 41% higher. And why exactly?
That’s the day the airline announced it will restore its domestic flight schedule in July to 55% of its schedule a year ago. That’s up from May, when the airline was flying at just 20% of its schedule a year earlier.
Now, yes, a leap from 20% to 55% is a welcomed sign of the beginnings of a comeback. But let’s put this news another way …
On the report that American Airlines will be offering 45% fewer domestic flights than a year ago (and 80% fewer international flights than a year ago), its stock erupted, beginning a climb that would see it gain nearly 100% in six trading sessions.
To be clear, kudos to anyone who got in and out safely with some of these big gains. But it points toward a question each of us should be asking ourselves today …
***Are we gamblers or investors?
There’s no right or wrong answer. And “gambling” isn’t always bad.
But what’s important for investors today — in the airline sector and beyond — is to avoid seeing fast, big gambling gains as evidence of even more, sustained investment gains.
Yes, American Airlines’ stock-climb just made some people a lot of money.
But what now?
How does American, and the entire airline industry, appear to an investor looking for longer, sustained gains?
In other words, at this point, are airlines a good investment or still a gamble?
On one hand, there’s the encouraging news that some airline travelers are returning to the skies. There are the increased flight schedule numbers we highlighted a moment ago. And there’s also data revealing that by the end of May, American’s daily flier average was up to nearly 100,000 passengers — more than triple its 32,000 average in April.
On the other hand, you have to remember that not all of this increased passenger volume is translating into the same average revenues as before. That’s because many airlines have been forced to slash fares to lure travelers back.
The New York Times reports that yields, which are a proxy for fares, are expected to fall 18% this year. Low-cost booking platform, Dollar Flight Club, predicts the discounts will be even greater, with average airfare prices dropping by 35% over the next 12 months.
So, sure, some fliers are back, but we have to distinguish between “bodies” and “profits.”
And of course, remember that despite the rebound, the number of “bodies” still paints a grim picture, as the industry is suffering historic declines. Data collected by industry association, Flights for America, shows demand for future air travel is down 82%.
Today’s news about a resurgence in COVID-19 cases around the country isn’t going to help that.
Let’s translate all this into profit/loss numbers …
Bloomberg just reported that airline losses are surging to unprecedented levels. In fact, they’re expected to be more than three times the losses that followed the 2008 global economic slump.
Specifically, airlines are predicted to lose $84 billion this year, and another $16 billion next year.
Here are those numbers with surrounding context:
Meanwhile, S&P Global Ratings wrote in a recent report that air travel demand is expected to remain below 2019 levels until 2023.
That’s a lot of bad news.
Still, airline stocks are down so much — and the government has promised to help support airlines — that it’s reasonable to ask “is this a good investment?”
Well, what do the numbers say?
***What cold, impartial numbers reveal about an investment in airlines today
When it comes to using numbers as a market approach, no one does it better than Louis Navellier.
Named the “King of Quants” by Forbes, Louis is one of the early pioneers in using predictive algorithms to scour the markets for quantitatively-strong stocks poised to climb. It’s an approach rooted in objective, impartial numbers.
Specifically, Louis focuses on sales growth, operating margin growth, earnings growth, earnings momentum, earnings surprises, analyst earnings revisions, cash flow, and return on equity.
Fortunately for you and me, Louis has created a free tool that’s built upon the same metrics that drive the big winners in his portfolio — it’s called the Portfolio Grader.
In his update to subscribers earlier this week, Louis revealed how the major airline carriers look today when run through his Grader:
As I always say, earnings are, well, the bottom line.
The great buys I’m finding now are the companies growing earnings — and really “earning” them, by growing sales first — AND doing this over the long haul. Otherwise, the stock is best avoided.
That’s the lens through which we’ll evaluate airline stocks here today with my Portfolio Grader.
***Interestingly, in his update, Louis called out the stock surge that airlines have enjoyed recently
Keep in mind, Louis is not against big gains coming fast. In fact, that’s what his Accelerated Profits newsletter is based on — finding stocks poised to experience periods of compressed hypergrowth.
The difference is the fast-gaining stocks Louis finds are rooted in numbers-strength, not speculation.
Back to Louis:
By Thursday, June 4, the four biggest U.S. airlines (UAL, AAL, DAL and LUV) had announced at least 25% more flights in June than in May. That day alone, airline stocks jumped 15% — even 41%, in the case of AAL, which is ramping up the most.
And, even so, all of these airline stocks earned a “D” for their Quantitative Grade, my proprietary measure of institutional buying pressure on Wall Street.
As you’ll also notice above, none of the Fundamental Scores were strong, either. Overall, the group is a D-rated “Sell.”
What about American Airlines in particular? After all, it’s seeing the most growth in terms of its flight schedule, and its stock has surged the most over the last handful of trading sessions.
Louis’ system grades it as a “D.”
The reality is, investors are bidding up a stock that gets an “F” for most of its fundamentals. It’s not growing sales; that’s been pretty hard to do lately, I’ll admit. It has a poor track record of Earnings Surprises.
And, with an “F” for Cash Flow as well, its cash reserves are woefully insufficient to ride out the storm.
Here’s Louis’ bottom-line takeaway for the sector as a whole:
… just keep in mind: Sometimes there’s a difference between an “essential business” (which airlines undoubtedly are) and a safe, long-term investment.
We could rephrase that as “sometimes there’s a difference between a profitable gamble (which airlines have certainly been recently) and a safe, long-term investment.”
To learn which stocks are earnings superior grades according to Louis’ Accelerated Profits quantitative system, click here.
***A word of warning
This “gambling versus investing” tradeoff isn’t limited to the airline sector. It’s all over the market today.
Here’s how The Wall Street Journal recently put it:
Stuck at home with few entertainment options, more newbies turn to shares; ‘it’s like a gambling game.’
Take rental-car leader, Hertz …
Last month, the 84-year old company filed for bankruptcy, and investment legend and major stakeholder Carl Icahn sold.
In stepped a slew of armchair investors like Cory Gerber, a 29-year-old electrician in Seattle profiled by the WSJ:
(Gerber) acknowledges Hertz is saddled with debt, faces intense competition and could have its shares delisted, rendering them worthless.
Yet, the Hertz brand name holds value and the company operates a huge fleet of cars, he argues. The stock was cheap enough to roll the dice, he concluded.
So far, gamblers like Gerber have been rewarded. As of Tuesday, Hertz was up 481% since Icahn sold his stake.
We’re seeing the same speculations in beleaguered oil, retail, and travel stocks. But I’d be curious how those investors are handling a day like today when the Dow is down over 1,300 points, and American Airlines is down nearly 15% as I write … which brings its two-and-a-half day losses to 28% …
As we wrap up, certain stocks and sectors have been surging — not because their fundamentals deserve it, but because gamblers have been placing bets.
It’s all good times and profits … until it isn’t.
Before you put money to work today, be sure you know whether you’re gambling or investing.
Have a good evening,
Jeff Remsburg
