Why I will never be a momentum investor. Or a trader.
I just can’t bring myself to say “Fundamentals don’t count if the price trend is good enough.”
Continental Airlines (CAL) has come up two of my screens in the last few days as a buy on its price momentum. It came up earlier in mid-September—on September 21 to be precise—when the stock crossed above its 50-day moving average.
It traded at $16.81 that day. It’s at $23.10 as I write this around 3 p.m. ET on March 12. That’s a gain of 37%.
But I just couldn’t buy the shares. Nothing against Continental but the economics of the airlines industry are just so horrible that a couldn’t get them out of my mind long enough to buy this stock.
Oh, well. As the scorpion said to the frog as they both sank to the bottom of the river, “It’s my nature.”
I love this little summary of the industry from the Financial Times this morning: Since 2001 the world’s airlines have flow 18 billion passengers, collected revenue of $3.75 trillion, and produced a net loss of $14 billion.
There’s a reason why so many airlines practice serial bankruptcy—it’s a way to shed costs so that, for a while, the airline can be a low cost-provider of air travel.
For a while. And then costs start to creep higher until one day you wake up and, compared to more recently bankrupt airlines, you’re the high-cost provider.
Continental’s two bankruptcies were just too long ago—1983 and 1990. Morningstar estimates that adjusted for length of flight Continental’s labor costs are now 26% above the industry average. The company even has a defined benefit pension plan. In these days! Shocking!
When a stock is coming off a bottom—a time when everybody is convinced the world is coming to an end—the fundamentals don’t have to look very good. All they have to do is be better. For example, Continental’s management told investors in its most recent earnings conference call that revenue from high-yield passengers (the folks that pay full freight or buy first-class and business-class tickets) fell 1% in December. Not a great performance—until you compare it to the 40% drop in revenue from this class of passenger in May 2009.
Watch stocks in general—and not just Continental—to see if fundamentals begin to count more as the easy-to-win comparisons with truly terrible quarters in late 2008 and early 2009 start to come to an end later in 2010.
Boeing seems overpriced to me, probably because of the 787. Their debt/equity is pretty ugly too (over 6). All that debt service is going to hoover their profits. With only a near 2% net profit margin, I think it may have started.
Lakesider,
This is a little stale but I’ll chime in and say that, to the best of my ability to discern, margins on the 787 are small and the program is mired in late delivery charges. For that reason, BA is actually increasing production on 737 and 777 aircraft, even though there is not as much demand for the older, less efficient platform. But if they sell at all, they will supplement cash flow – which otherwise will be a little bleak until approx mid 2011 when 787 deliveries start to really roll. I was seriously thinking of shorting BA at the moment because institutional re-stocking may have them overbought. The tanker situation is the wildcard – I thought it was priced in but now am unsure.
taterbug, southof8-
Thanks for the reply- I’m from SE Michigan. Detroit’s northern boundary is Eight Mile Road, so south of 8 means Detroit (north of 8 is Oakland County, MI, where all the money is). I know nothing about San Diego’s geography; I was an east coast sailor.
Ed- I used to work for the leasing arm of McDonnell Douglas. It amazed everybody that the company could crumble as it did. Of course, GM crumbled pretty quickly, too! Do you think Boeing can pull it up, now that they finally got their plane off the ground?
The last time I invested in an airline was Alaska Air, which actually made me some money.
That said, if I was going to invest in the airplane area, I’d look more at airplane and parts manufacturers. Although most of those are a bit overpriced atm.
Very very bad news that we already know…
“U.S., U.K. Move Closer to Losing AAA Debt Rating, Moody’s Says ”
““The ability of the U.S. economy to grow more rapidly and, therefore, for government revenues to contribute to fiscal consolidation, will have to depend on a revival in the growth of consumption.””
Yeah, ya think thats gonna happen anytime soon?,
http://www.bloomberg.com/apps/news?pid=20601068&sid=a0a8xAghPS8I
Try Babcock & Brown Air Limited (FLY) instead. Leasing the planes is much safer than operating them! 8% div yield.
Jim hits the proverbial nail on the head. Airlines are for Traders — “Get in, Get your 12% pop, Get out.” If you don’t have the stomach for turbulance, can’t handle the risk of a crash and burn, stay out of the sky. Only the CEOs get parachutes!
southof8 – as another from the “quality” side of San Diego, I’m surprised that you admit it. Other than Gaslamp/Balboa/SymphonyHall, what we got to brag about culturally? Oh, Petco. But we do have CultureS. International flavors long before hitting the border.
Jim,
Is there a reason you don’t like Boeing (BA). The stock seems to have taken a flight and is trending upwards. With increasing population and globalization, I would expect more passengers, more air traffic and BA to do even better. Not to forget it’s exposure to the defence industry. Would be great if you can share your opinion about Boeing. Thanks for your thoughtful advice.
taterbug – in due time
Frogs, scorpions, airlines and health sector. I can’t get my hands around any of them. Too many other sectors with more stability.
nitin_kakkar:
http://online.wsj.com/article/SB10001424052748704131404575117740392401032.html?mod=WSJ_business_whatsNews
Jim,
Congratulations! … and please don’t change your fundamentals-first approach. It’s especially useful for accountancy illiterates like myself to have your interpretive read on the data along with your experienced perspectives. Airlines? Eeeew!
Thanks for your great work – it is always a pleasure to read and consider your thoughts.
Jim, I respectully differ from your opinion. I believe there is way to make money in airline sector. Look at LFL, Singapore airline, Cathey, China eastern, south west etc. I dont think AMR ever filled BK. CAL & AMR are doing very good on international sectors. at least on busy Asia – US routes their flights are mostly full atlest 2 weeks in advance and prices are comparable to other airlines. They also have code sharing agreement with air china, air India and many others. Both CAL & AMR are cutting flights which are not profitable and focusing where profits are higher. I think both CAL & AMR will be cash flow positive this year.
UAUA is altogether different story.
Lakesider, I am in beautiful San Diego. Some folks here say there is no life east of I-5, but I say there is no culture north of I-8. Qualcomm and biotech yes, culture, not so much. I’m sure others disagree, but that explains my moniker.
lakesider– Are you midwesterner like ski-town or SW like South Haven or Lakeshore. Maybe NW like Ludington?
Jim,
Congratulations! I hope they give you something more than a shiny trophy to put up on the mantel and show the kids. Thanks for all your great work.
This is one industry I have never looked seriously at b/c the upside seems basically nill. Plus I am not a momentum investor.
I would suggest the reason they have a defined benefit plan is b/c the next time they go bankrupt they can just turn it over to the PBGC.
Jim,
Congratulations on the SABEW award. Like mopama said you deserved all of it. Unlike so many others you dont toot you horn at all. If it were some other stock picker from Wall St that got the award they would be all over the press claiming victory. Keep up the good work, the returns and those tips!!
Jim,
Great article. I’d like to offer a suggestion if I may. An article that describes the details of different investing styles, and what type of person fits each sytle may be beneficial to those new to investing, and maybe even those of us who have been at in for a while. If people knew what type of investor they want to or should be, it might help them when deciding what stocks to pick, or not to pick.
Just a suggestion…keep up the great work.
Jim,
Congratulation for the award you just received. You earned it! You deserved all of it!!!.
‘MoneyShow.com’s Jim Jubak Wins 2009 Best in Business Award’.
southof8-
Off the subject, but I’m intrigued by your moniker. Are you in the Detroit area? South of Kerchival in Grosse Pointe, perhaps, or farther west in Washtenaw County?
As Buffet says, never in the history of the world has a technology had such an impact with nobody making any money. From the first flight investors have collectively been wiped out several times over by airline companies- nobody has made a dime. Must take steel cajones to play in this space.
Jim, not to be rude but any updates on ORA you talked about 2 days ago? Thanks for everything!