Spirit Airlines (NYSE:SAVE) Chief Executive Officer Ted Christie believes that his airline will recover from the novel coronavirus downturn sooner than the four major carriers. If that’s true, SAVE stock suddenly becomes an interesting alternative for those looking to benefit from an eventual recovery.
But does it make Spirit the better long-term buy?
Forget the Big Four?
In 2020, I’ve written on several occasions about the big four airlines: Southwest (NYSE:LUV), Delta Air Lines (NYSE:DAL), United Airlines (NASDAQ:UAL), and American Airlines (NASDAQ:AAL).
Of the four stocks, I prefer Southwest because it has a healthier balance sheet and Delta for its strong focus on the customer. I had never considered Spirit Airlines until I saw Christie’s comments on FlightGlobal.
“Christie attributes his relative optimism to Spirit’s focus on carrying leisure travelers, a segment he and industry observers suspect will rebound faster than business and long-haul international travel,” FlightGlobal’s Jon Hemmerdinger wrote on Oct. 12.
“‘Our leisure segment will come back faster than traditional corporate travel,’ Christie adds. ‘I don’t think its long-term impaired in any way.’”
I’ve held the belief in 2020 that if you’re going to bet on the airlines, a much smarter move is to buy U.S. Global Jets ETF (NYSEARCA:JETS), a diversified bet on improving industry conditions.
“I don’t think you could draw up a better game plan for somebody looking to benefit from a resurgence in air travel than to buy some shares of JETS,” I wrote on June 30.
“Millennials might do some dumb things — who doesn’t? — but buying JETS is not one of them if, and it’s a big if, their reason for doing so is they believe air travel will eventually return to normal, historical volumes.”
At the time of my June article, the major four carriers were the top four holdings by weight. Today, the same holds with Delta (10.15%), Southwest (10.05%), United (9.84%) and American (9.32%).
There’s no mention of Spirit Airlines in the 39 holdings.
Since June 30, SAVE stock is down 7.6% through Oct. 14. During the same period, JETS is up 5.5%, 13.1 percentage points better than the leisure airline.
Unless I’m missing something, my “rising tide lifts all boats” philosophy appears to be getting the job done in recent months, and I don’t see why it shouldn’t continue to do so into 2021 and beyond.
Betting on SAVE Stock Over the Long Haul
While there’s an argument to be made that Spirit Airlines will indeed recover before the big four, this is an exercise in investing.
If you bet exclusively on SAVE and it doesn’t recover any faster than the other airlines, you’re likely to be no further ahead than if you exposed yourself to the company risk of one of the big four.
However, an InvestorPlace article recently argued that Spirit Airlines stock provides the best value of any airline stock at the moment.
“[T]here’s a case that SAVE should return back toward early-year levels. The stock came into 2020 trading at about $40 per share. Even falling 20% short of that target still would lead Spirit stock to double. 100% returns over three or even five years should handily beat the market,” the article read.
“But, again, even that $40 level looked reasonably attractive. Bear in mind that Spirit earned more than $5 per share (here too on an adjusted basis) in 2019.”
Bottom line: If Spirit hits $5 per share in adjusted earnings at some time post-pandemic and investors give it a multiple of 10x those earnings, you’re looking at a very compelling return on investment over three to five years.
I can’t argue with that rationale.
That said, I still think in this particular situation that the risk-to-reward proposition of investing in JETS is more favorable than putting all your chips down on Spirit Airlines.
As I said in June, I would love to see an equal-weighted version of JETS where every stock’s performance pushes its share price higher as opposed to counting on a select few. If this were the case and Spirit’s stock was one of the 39 holdings, I’d be even more confident in my argument that JETS is a smarter buy.
But, if we’re talking about picking between the four majors’ stocks and SAVE, then I’d agree with my colleagues that it’s the better buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.
