Here's When to Buy Airline Stocks (Hint: Not Now)
Posted at 5:00 a.m. EDT on Friday, May 29, 2015
The airlines are a hard sell right now, and I don't mean that they are difficult to part with. I mean that they are, right now, in free fall and this market abhors bottom fishing.
Think about it. Can you recall a group that was able to recover from a sustained free fall in ages? Can you think of any sector that's been able to bounce from a real hammering and come out on the other side?
Sure, one could say the biotechs have. Yet most are still well below their highs of earlier in the year. Some of the cloud stocks have come back but they, too, haven't gotten anywhere near where they were 15 months ago.
Now, those comebacks were injured by supply of the stock, as many initial public offerings of inferior merchandise blotted out any hope for a sustained rally.
This potential airline comeback is harder to imagine because this one's related to earnings, price to earnings multiples, and amazing outperformance for far longer than anyone thought possible.
Let's take the case of Southwest (LUV), which is the best and most profitable operator there is. When I spoke to CEO Gary Kelly last night, it was very clear to me that he's being far more disciplined than some pundits think. But it takes many to tango, and it doesn't matter if Gary's being disciplined if others aren't.
Gary said that May was coming in softer than he would like. That immediately says to me that the $3.46 consensus number for the year, the one that makes the stock seem like a bargain, is way too high. I hate buying stocks with number cuts just ahead, which his clearly the case.
Well, you might say, Southwest's stock is too expensive, how about buying American Airlines (AAL), which has a price-to-earnings ratio of 4?
Let me tell you something. That's a total red flag. Every time I have seen that low a price-to-earnings ratio, it is a sign that the future earnings are about to be slashed, maybe slashed drastically.
Now, I do not think this is the case of Bethlehem Steel, which sold at 2x forward earnings a few short years ahead of when it filed for bankruptcy. One of the best bets I ever made was to short Bessie, as we called it, betting that the reason why it sold at such a low price-to-earnings multiple is that the estimates had to be totally wrong. They were. Bethlehem ended up drenched in red ink the next year because of foreign steel dumping, and it never came back.
The airlines are in much better shape than Bessie when it comes to their balance sheets and there isn't anywhere near the capacity coming on as there was from China and Korea in the early '90s in the steel industry.
Still, the fact is that the estimates are too high and stocks do not bottom ahead of earnings estimate cuts. They bottom after the cuts. So here is what I wanted to do if I wanted to own LUV or any of the stocks in the group. I would wait for the cuts to occur. I would wait for the downgrades to happen. I would wait for the chartists to pronounce these as the biggest head and shoulders patterns known to man.
And only then would I do some buying -- no matter where the stocks are. But if history is any guide, and it usually is, I bet those buys occur lower, not higher, than where the stocks are now.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the stocks mentioned.
Posted at 4:12 p.m. EDT on Thursday, May 28, 2015
Sometimes when you have a broad theme, the money seeks out whatever investments it can find in the space.
That's the way it's developing in the cybersecurity and organic and natural spaces.
Last night's quarter from Palo Alto Networks (PANW) is an excellent case in point. Here's a company that may be the single hottest stock in the universe of enterprises I follow.
While we have always found the stock to be expensive, in many ways it deserves to be expensive. The premier best-of-breed cybersecurity company gave you 55% revenue growth, beating the estimates by 5% and lifting sales by 8% from the previous quarter, signaling some amazing order wins. Plus it bought a company, CirroSecure, which works on cloud security, bolstering what will be recurring revenue in the subscription area -- the best kind. The company is huge overseas but you didn't hear any complaints from CEO Mark McLaughlin, one of our favorites, because business is accelerating everywhere.
Remember, McLaughlin told us that ever since cybersecurity became a "board level issue" -- meaning that there's a chunk of time being spent with board members about the need to spend money on this issue -- business has been accelerating. Palo Alto offers a soup-to-nuts option and is known for its prevention strength. With no let-up in growth and new clients begging for help, Palo Alto represents the quintessential company that executives want to bring in to please the board and assuage the shareholders that management is doing everything it can to stop cyber-crimes.
Palo Alto is part of an elite group of pure plays on cybersecurity. FireEye (FEYE) is the ultimate in cybersecurity forensics and is now the go-to company in order to avoid liability for cyber-crimes, as it has earned a federal government seal of approval that says your company's doing everything it can to stop cyber-intrusions. It's a terrific company with best-of-breed technology to find out who is hacking, and when you see any big hacking -- Sony (SNE), Home Depot (HD), Target (TGT) -- you almost presume they are getting the call.
CyberArk's (CYBR) got the keys to the kingdom, assuring that nobody hijacks the entire internal security system. It's run by a bunch of brilliant Israeli Defense Force guys who seem to thrive on protecting the inside of the cyber-defense ring.
Fortinet's (FTNT) got terrific technology for threat protection. It's less even in earnings than some of the other companies, but it serves as a pure play. And I like Checkpoint (CKP), even as it was downgraded the other day to a sell at Morgan Stanley. I think this segment is too hot to take any player to a sell.
Finally, if you want to think big, the name on everyone's lips for security integrated and embedded into the Internet infrastructure, that's Cisco's (CSCO) bailiwick. I think it is far too underestimated as the ultimate in security for the future. That's another reason why the stock's too cheap not to invest in.
When you have a shortage of stocks to play a theme, you can levitate for a very long time as we see in the companies that offer organic and natural product lines. Hain Celestial (HAIN) and WhiteWave (WWAV) are the only pure plays and we know from Hormel's (HRL) purchase of Applegate, you either get more organic and natural or you fail to meet the demand of the millennials, who won't always be millennials. They will be majoritarians. That's why I like both of those stocks.
And it's why I think you can still buy any cybersecurity stock. We are in the early innings and we don't have enough choices so they will all get their due and trade higher even as they are among the most expensive stocks in the entire market. High growth and cybersecurity equals scarcity value and when you have scarcity demand overwhelms supply in any business and the price of the merchandise -- in this case the stocks -- almost ineluctably goes higher.