Time to Book a Flight

 | Feb 07, 2014 | 11:30 AM EST
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If the airline industry's last decade was characterized by crash-and-burn experiences -- billions in losses and bankruptcies almost too numerous to count -- the current decade finds the industry flying relatively steady in clear, blue skies.

With the Delta (DAL)-Northwest, United (UAL)-Continental and the recently completed American (AAL)-US Airways mergers, the industry's major combinations seem to now be set firmly. Even Southwest (LUV), the only major domestic airline not to have seen the inside of a bankruptcy courtroom, made a purchase in 2010 of AirTran Airways.

The airlines are using these mergers, lots of add-on fees and judicious cost cutting (last year's removal of Memphis as a hub for Delta, the recently announced removal of Cleveland as a hub for United) to solidify their financial foundations. The financial health of the industry is probably stronger than it has been for years.

It should not be a surprise to learn some airlines are today solid investment opportunities. To choose stocks to recommend, I use computerized strategies I created based on the thinking of some of Wall Street's greatest investors.

Three domestic airlines earn the highest grades from these strategies – Southwest Airlines, Alaska Air Group (ALK) and Delta Air Lines.

Southwest and Alaska are favored by my Peter Lynch-based strategy. The P/E/G ratio, which is price-to-earnings relative to growth, is this strategy's chief focus. It provides the investor with a tool to measure how much one is paying for growth. If you know anything about stock market investing, you probably know that what drives stock prices is primarily growth and earnings.

A P/E/G of up to 1.0 (that's $1 in stock price for every percentage point of growth) is acceptable. Go below 0.5, and you are flying high by the Lynch strategy's standards. Southwest is in this sweet spot, with a very desirable P/E/G of 0.48. Alaska's P/E/G is even more favorable at 0.29. Both airlines have kept their debt to reasonable levels, which is another plus.

Delta gets a nod from my James O'Shaughnessy strategy. This strategy first looks at three variables: market cap (which must be at least $150 million), earnings that have improved in each of the last five years and a price-to-sales ratio below 1.5. This last variable is a measure of how well-priced a stock is.

Delta meets or beats all of these criteria, with a market cap in excess of $25 billion, continually improving earnings and a low P/S ratio of 0.68. The final variable used by this strategy is relative strength, which is a measure of how well a stock performed in the last year relative to the entire market. The top 50 companies -- those that pass the initial three criteria and have a high enough relative strength rating -- earn the highest scores. Delta's relative strength of 91 places it in this elite group of 50.

You may not like being a customer of today's airlines, but you should be impressed by how likeable are their financial performances. This is a good time to take a flyer on an airline stock.

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