Sometimes potential mistakes are easy to spot, as was the case on June 5 when I cautioned about chasing the airline’s rally after-the-fact. My write-up then came the day after JetBlue (NASDAQ:JBLU) rallied 15% in one day on top of a bunch more that week. The note was prophetic since JBLU stock made a u-turn and fell 35% from what turned out to be an interim top.
My exact words were: “I don’t care how good the news was, moves this big make it impossible for me to chase in good conscience.”
Today’s point is not to say I told you so, but to share my buy-the-dip idea. Near $10 per share, JBLU stock is worthy of owning in a diversified investment portfolio. Since the effects of the global quarantine are still in full bloom, airline stocks remain very high risk. I consider all of them to be speculative bets because their business processes are still in compete shambles.
In June I suggested that there would be sellers from $13 through $15 per share. That happened and now it is closer to $10, so investors can start catching the falling knife, especially those intending to keep it for a while.
JBLU Stock Speculative Even After Balance Sheet Boost
I just traveled overseas and I saw first hand the decimation in the industry. Even though my flights were full, there were so few to choose from. In fact, they canceled my original flight to Cancun because they didn’t sell enough seats on it.
Yesterday’s air traffic screening report from the TSA showed that screenings are still down 72% from this time last year. It is dangerous to chase headlines like the one that sparked the frenzy back then as it rarely works out mid-term. Today’s idea is the opposite of that and under much calmer conditions.
There is no going around the fundamental thesis and the airlines profit-and-loss statements are in shambles. There is hardly any top-line flowing into JetBlue and its competitors and they are all bleeding cash. Even though they have shored up their balances, there is still tremendous pressure on their balance sheets to boot.
Collectively, the airlines have raised record levels of debt in a short period of time. This is in addition to the bailouts they are getting from the government. While this increases their chances of surviving the pinch, it does nothing to repair the business.
Fundamentally, it is hard to judge its business because of the disruption in the income stream. Regardless, JBLU stock is still cheap with a 13x price-earnings ratio, so on paper there is little froth in the stock price. But this can change on a moment’s notice. The only comforting notion is that just few days before the global quarantine these businesses were very healthy. The assumption is that they will eventually go back to or close enough to it.
The Vaccine Solution to the Crowd Economy Stocks
Scientists are working hard to find a vaccine for Covid-19. The message from experts like Dr.Fauci assure us that it is only a matter of time before we have more than one. I remain skeptical but I will yield to the experts on that front. If they are right, then the new normal will not be too different from before. Else, I expect new regulations to limit the capacity on planes.
During my recent travels, I found it astonishing that I was sitting shoulder-to-shoulder with strangers. I live in California and our Governor is screaming panic about social distancing, yet here I was sharing an armrest with a person I don’t know for five hours. This contradiction cannot continue to exist. They cannot restrict us on the street and then let us fly packed like sardines in the air.
I remain confident that in the end, contracting Covid-19 will be like the flu thanks to much improved therapeutics. Most will survive it and those who fell to it in the early stages could have probably done better now with improved care techniques.
For airlines stocks to win long-term they need certainty from the medical community and from the FAA. Currently it seems like they are making up the rules as they go. I flew United Air Lines (NASDAQ:UAL) where they sold every seat. Their policies on this front are getting lax as they become more desperate to recover.
The airline stocks will be big winners once the vaccine is announced and on every hint of headline until then. Investors should either be long or avoid them. Case in point: today we have a new headline from Novavax (NASDAQ:NVAX) that is likely to have a positive effect on Covid-sensitive stocks.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.