Getting Through the Dog Days of Summer

Even amid dark days for the airline sector, there's still money to be made.
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I have to warn you: I am not in a good mood today. Airline stocks have been pathetic of late, revenue is spiraling downward, and most importantly, a lightning strike from severe storms that rumbled through Dallas Fort-Worth last night apparently fried my

G3

desktop computer.

So, you know what? I don't want to hear your complaints about falling airline stocks. Well, on second thought, I'll make an exception for loyal

TSC

readers.

Let's take a few minutes and dissect what the heck is going on with the airline sector of late, and where we see a few opportunities to make some money in the shorter term.

Yes, we said make money. Not lose money.

First, let's be up front about the two biggest factors that are working against making a profit in the sector right now. One is the declining unit revenue for the U.S. carriers, which we talked about

last week. The rather strong 3% decline in unit revenue for April was a shock, and, as we predicted, it has already prompted several analysts to downgrade stocks or cut quarterly earnings estimates. This is early in the quarter for such dismal refiguring.

We are going to see still more gloom-and-doom pronouncements before the quarter is even close to being over. And the effect is usually immediate. Witness Monday, when Susan Donofrio of

BT Alex. Brown

announced a number of downgrades. The sector, for the most part, saw nothing but red when the final bell tolled.

However, we did not mention last week that this is also the time when airline investors have to deal with what I call the "Hamptons Effect." As we have outlined for three Mays in a row, there is a historically proven pattern of airline stock behavior during any given year. Many institutional investors will buy shares of airline stocks in December, hold them, take the gain that the spring months usually produce, and then unload the stocks around the end of May.

I have dubbed it the "Hamptons Effect" for obvious reasons. It's easy to envision traders wanting to rid themselves of those pesky airline shares before jumping on the Hamptons Jitney and heading to the beach.

So, right now, not only do we have declining revenue beating down the industry, we also have a cyclical buying and selling pattern to deal with.

Ayeeee! What's an investor to do? I know. I can hear you now: "Just sell those airline shares and get on the Hamptons Jitney with everybody else and forget about it!"

Well, I have a problem with that idea. I am stuck here in Dallas. So for that reason, I have come up with some better ideas.

Wing Tips Summer Airline Investment Suggestions

1) Don't make the mistake of thinking in old buying patterns. In years past, the airline stocks tended to react and perform like a bunch of trained seals.

AMR

(AMR)

went up, they all went up.

UAL

(UAL) - Get Report

went down, they all went down. The sector, in many cases, was looked upon as a cyclical homogeneous group.

This is no longer the case. And investors who understand this difference should be able to ferret out opportunities in the sector -- even as we go into the summer months.

What's the best example of a stock that falls into this "don't lump us with those other losers" category?

Frontier Airlines

(FRNT)

, which has continued to post strong numbers all spring, although the stock has dipped a bit this past week.

Delta Air Lines

(DAL) - Get Report

was one of these earlier in the year as the stock continued to post gains, while the airline's major competitors were fairly stagnant.

2) Think short shorts. I like to look at shorter investment time frames in the summer -- days or weeks. I am not a daytrader at heart, but I think longer-term investment thinking should be put on the shelf until the fall when dealing with this sector. Summer is just too wacko to think long-term.

3) How low can they go? As airline stock prices continue to dip, look for resistance points to be hit. And then pounce. There are short-term gains to be had here. If you watch shares of

US Airways

(U)

and AMR, for instance, they've dropped back substantially in the last two weeks but are also pretty resistant. Once they hit certain price points, they bounce back up.

4) Be ever alert for the "analyst downgrade bounce." We had a perfect example of market overreaction last week, when analysts downgraded

Atlantic Coast Airlines

(ACAI)

over comments made by management concerning deteriorating yields and RASM figures for the quarter. The stock dropped 31% in one day on the news. If you are a regular Wing Tips reader, you should know that ACAI is in the middle of the

Battle for Dulles, and as a result of the ramp-up in new routes the airline is doing on behalf of partner United Airlines, this deterioration was expected.

This is and was a buying opportunity, depending on your investing time frame. And we are going to see a lot more of these situations in the next month or so.

Tomorrow, we will answer a few emails that we think are important to share, and ask what you would like to see more of here in Wing Tips. Also, we'll look at Proposition RJ, a controversial study released in Washington today. It points out how regional airline growth is crucial to smaller communities and to continued airline expansion. Tomorrow we'll give you what we think are the nuggets, from an investor standpoint.

Holly Hegeman, based in Dallas, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.