Major Airlines Looking for Stock Market Takeoff in Fourth Quarter - TheStreet

Major Airlines Looking for Stock Market Takeoff in Fourth Quarter

Horrible third quarter coupled with traditional cyclical rebound bode well for the stock prices of major airlines.
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With the start of trading this morning, we opened the books on a new quarter for the airline sector, which, as we

said yesterday, could not have happened soon enough.

Today, we'll review some of the basic principles that govern trading and investing in this sector, and take a wild stab at just who is going to do well this quarter. Of course, given the horrible results from this last quarter, you might say that this exercise would be akin to shooting fish in a barrel. There is only one way to go, and that's up.

Why is that? And is this cyclical movement more the norm, or an aberration for the sector?

Let's take a look at the overriding factors impacting the sector.

First, remember the overall cyclical nature of institutional buying that normally occurs within the sector. If you take the performance of the ten major airlines and track their returns over the last 10 years, you'll see that the stocks outperform the

S&P 500

. They also outperform a buy-and-hold strategy when they are purchased at the end of the year, held through the spring and then sold before the end of May.

Obviously, the exact timing of this cycle can vary somewhat, given other factors in the market at the time.

But generally speaking, this is the overriding cyclical buying pattern that is a factor within the sector -- and particularly with the ten major airline stocks.

Historically, this means that institutional buyers buy in the winter, based on expectations for the heavier summer months. By the time the summer months appear, the stocks are sold, because the added price appreciation in anticipation of third-quarter revenues has already been built into the stock. And yes, this then ensures a peaceful summer at the Hamptons, free from fears of airline stocks tanking in the meantime.

So with this overall cycle in mind, now is the time to take a close look at the major airline stocks, see which ones stand to do well next year and formulate your investment choices. Come December, you can plop that money down.

We have another convergence of sorts that would seem to back up this rationale even more this year. Major airline stocks have dropped back some 35%, give or take, from their highs last spring.

Folks, we aren't talking about Internet stocks here. These stocks are not going to keep dropping.

No, because of this rather steep selloff -- much of which is related to Wall Street's concern over rising fuel prices and dropping yields -- we now have airline stocks that are priced just plain cheap.

So, between the cyclical nature of the buying patterns, coupled with the effects of last quarter's sell-off, airline stocks are poised to go up, not down.

Here's a really quick rundown of who we like right now in terms of the major airlines. We'll do more in-depth looks at many of the majors later, but for today, let's just take a quick and dirty look-see.

Top Major Picks

  • Best Overall: United Airlines (UAL) - Get Report. United is now top dog in our rankings, in terms of the Big Four. It takes over the reins from Delta Air Lines, (DAL) - Get Report which we now put in our No. 2 position.
  • Best Turnaround Play: Has to be US Airways (U) - Get Report, although I don't think we have seen the worst yet in terms of continuing problems with the airline's operations. Both US Airways and Northwest (NWAC) have a lot of work to do to turn revenue around successfully. Those challenges still are not likely to discourage institutional investors from clamoring back in, expecting the turnaround bounce. In that regard, we'd take US Airways over Northwest, because of Chairman Stephen Wolf's historic good relationship with the Street. Then again, after this year's disappointing performance, that relationship is on a bit of thin ice.
  • Longer Term Choice: Southwest Airlines (LUV) - Get Report, whose stock is cheap, cheap, cheap (a rarity for this stock). Fuel issues aside, this one is a screaming buy at $15 and change. This one is also the only one I would recommend for a possible longer term hold.
  • Strong contender: Continental Airlines (CAL) - Get Report is another stock we really like. The airline consistently generates some of the most positive passenger feedback that we receive, and that means a lot, especially now. The airline did a pretty good job at keeping up with an explosive growth plan this past year. We like the stock and think it has the potential to make a nice move this spring.
  • Problem child: TWA (TWA) : We don't think TWA is a turnaround play. We are concerned about TWA and expect the airline to report poor results for the last quarter. From what we understand, yields for the airline are very poor. And remember, this airline cannot afford to lose money in the third quarter, which traditionally is its strongest quarter. Even so, at $3.50 a share, you have to wonder why another airline hasn't grabbed TWA. I mean, the airline is worth at least that much. Again, we like many of the operational and strategic changes the new management team is making (selecting San Juan as a new "Focus City," or hub, is a very good concept), but will they be enough?
  • Niche of the North: Alaska Airlines (ALK) - Get Report: Alaska continues to do what Alaska does best: run a successful niche operation. The only thing we don't like about Alaska is that the stock attracts speculative money like a sponge. That can be good when the money runs the stock up on merger speculation, as has happened many times. And it can be bad when no merger happens and the speculative money flees -- leaving the stock to tank.
  • Weak link: AMR's (AMR) American Airlines : Of the Big Four, we see American as the weak link this cycle. One, the airline has serious operational issues that are driving up costs and driving down yields. Worse, I don't see management doing a lot to address the issues. Right now, I would have to say that reader mail from unhappy American passengers is at the top of our ongoing passenger-pulse survey. Secondly, as for that long-promised spinoff of Sabre's (TSG) - Get ReportTravelocity -- we don't see how that can come about until Sabre has a new CEO. So, we are looking at a delay here.
  • Cloudy skies: America West (AWA) : We expect to see costs creep up and yields continue to fall back on this one. We have never really liked AWA as an investment choice, only because the stock frequently behaves totally out of line with the fundamentals of the airline's financial situation.

There you have it. Just some nuggets for you to chew on. Have a great weekend. Talk to you next week from our new environs.

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.