In May, days after Warren Buffett bailed on his airline bets, I suggested that until they find a vaccine, investors ought to look elsewhere.
The main thrust of my article was to assess the chances of the federal government making money off the 2.64 million warrants it got as part of its grant and loan to the airline. The exercise price is $9.50, and it can do so anytime within the next five years.
Already in the money, on the surface, it appears that the feds got a good deal. But when you consider how much free money JetBlue got for payroll purposes ($685 million), they should have gotten more warrants. And they didn’t.But I digress.
JBLU Stock and Its Credit Rating
The topic de jour is JetBlue’s credit. S&P Global Ratings doesn’t think it’s very good.
“While the company is reducing capacity and some associated costs, and benefits from the steep decline in oil prices, we expect these to continue to be more than offset by much weaker traffic levels,” S&P stated in its cut.
The ratings’ agency believes the airline is going to have serious cash flow difficulties in the weeks and months ahead. Unless you just landed on earth from Mars, that’s a fairly commonly held belief amongst financial and industry experts. You’re not really going out on a limb by stating the obvious.
Nonetheless, if you’re a long-time owner of JBLU stock, you ought to be worried about what lies ahead. Its stock had managed to crawl its way back from below $7. The ratings cut killed any momentum it found in the early part of June. Since it hit a three-month high of $15.59 on June 8, it’s fallen 29%.
Fortunately, if you own JBLU, as it’s struggling back, trading at around $12.26 pre-market today.
I Continue to Feel JETS Is a Safer Play
According to S&P Global Ratings, Southwest Airlines (NYSE:LUV) is the only U.S. airline with an investment-grade rating at BBB. The rest of the big four: Delta Air Lines (NYSE:DAL, United Airlines Holdings (NASDAQ:UAL) and American Airlines Group (NASDAQ:AAL, have ratings of BB, BB-, and B-, respectively.
In early June, I said as much, suggesting that of the major airline stocks, Southwest easily had the best balance sheet. Although suspicious of airline investments, I emphasized that Southwest was your best bet were you inclined to make one.
Moving outside the realm of individual airline stocks, I wrote in May that the U.S. Global Jets ETF (NYSEARCA:JETS) could be a possible wildcard. Although the big four accounts for approximately 44% of JETS’ total portfolio, it has 43 holdings, including JetBlue, at a weighting of 3.93%.
Not only does JETS have airline stocks — U.S. and international — it also has positions in airport operators, defense contractors, and cargo businesses. If you believe in the saying, “A rising tide lifts all boats,” JETS makes a lot more sense than trying to thread the needle picking the one company to be the cream of the crop.
“Some portion of this [JETS hitting $1 billion in assets] might be millennials using Robinhood to speculate, but if you look beyond 2020, you can be optimistic that the industry will recover,” Dan Weiskopf, portfolio manager for Toroso Investments, said on June 5. “Using an ETF as a way to reflect that thesis offers a ton of upside.”
Weiskopf’s rationale is why ETFs were invented in the first place.
The Bottom Line on JetBlue Stock
Millennials might be making rookie investment mistakes investing in bankrupt companies. Still, if they are using JETS to make a bet on the airline industry, they are redeeming themselves and then some.
It’s about as smart a bet on a long basis as you can make.
If you have to bet on a specific airline, I’d go with quality. That’s Southwest. If you’re contemplating JetBlue, I’d bet on JETS instead. You’ll be happy you did.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.