Two Favorite Spec Plays Get Hot

 | Apr 08, 2013 | 10:51 AM EDT  | Comments
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Stock quotes in this article:

lcc

,

dal

,

ual

,

luv

,

save

,

rdn

After a pronounced but brief period of underperformance, my two favorite speculative ideas for 2013, airlines and mortgage insurers, are starting to come roaring back, aided by timely research that gets the fact that they aren't one-quarter wonders.

You know, I believe that I have hated the airline stocks ever since I gaffed my account base at Goldman Sachs when I recommended American Airlines as the best stock of 1985.

I have stayed away from them ever since, until this year when the government blessed the US Airways (LCC)/AMR deal as a way to bring AMR, the old American Airlines, out of bankruptcy. Today, Deutsche Bank comes out with a breathtaking piece of research headlined "March q preview, Airlines on track to more than double March q operating profit." Frankly, this is astounding and explains a lot about why the airline index increased 27%, far exceeding the S&P's excellent first quarter.

Deutsche is predicting a 42% upside for Delta's (DAL) stock over the next year, a 37% increase for United Continental (UAL), 32% for Southwest (LUV) and 27% for US Airways. The stocks are finally catching up with the fundamentals and could be the industry's fourth year of profitability, Deutsche Bank points out.

The best, I believe, will be the US Airways-AMR combo because it will create the world's largest airline and will most likely NOT be challenged by upstarts, which has been the case every other time that airlines got pricing power that I can recall. Remember, the big routes are now being divvied up to just a couple of large, sensible, rational players and I sense that the price wars are a thing of the past. We recently interviewed the CEO of Spirit (SAVE), the only real upstart with traction, and Ben Baldanza told us that he wasn't the least bit interested in competing with the big boys and likes to go where they aren't. Again, the blessing of the consolidation by the Justice Department's antitrust division makes all of this possible.

As far as the mortgage insurers, an outfit with good research called Macquarie today recommends Radian (RDN), by far my favorite in the group, as it has tremendous earnings momentum that comes from the rollout off bad mortgages and the increase of money in good mortgages, something that's happening at lightning speed. Recall that there used to be a ton of players in this industry, but the competition has dropped off dramatically and the government, which had been the biggest player in the industry through the FHA, has reined in its mortgage insurance business dramatically.

Both the airlines and the mortgage insurers have run and I think a lot of people believe they are late to the party. But I think that leaving the table now before the explosion of positive earnings is about to hit is just plain wrong. The sponsorship for the groups is still minuscule, the estimates just started ramping up. That's much closer to the beginning of a move than to its end. These stocks should be bought and bought aggressively.

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