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  1. Home
  2. / Investing
  3. / Transportation

Why I'm Not On Board the Airline Sector

Lower fuel costs help, but I don't recommend a sector bet.
By KATE STALTER Jan 21, 2015 | 09:00 AM EST
Stocks quotes in this article: DAL, UAL, ALGT, ALK, SAVE, LUV, IYT

Airline stocks were among the highfliers in Friday's session. Falling oil prices are providing some lift to the industry, ahead of a fleet of earnings reports due this week. Delta Air Lines (DAL) and United Continental (UAL) are among the carriers set to announce quarterly results. Some analysts expect both to beat estimates (and Delta did).

Fuel prices total about a third of airlines' overall expenses. Normally, airlines hedge fuel prices to guard against rising costs. However, in light of recent developments, some airlines are curtailing their hedging activities -- for the moment, anyway. While some of the fuel-price decrease will be reflected in fourth-quarter results, there's likely more good news to come for the industry.

Allegiant Travel (ALGT) took flight Friday to the tune of 1.54%, and another 4% Tuesday, to about $170, near an all-time high. The company specializes in carrying vacation travelers to destinations such as Orlando and Las Vegas. The company also offers vacation packages, which include hotel rooms and rental cars. Despite the price gain today and Friday, there was some news with potential to disrupt the company's service: Allegiant pilots voted to authorize a strike. The vote, which had a whopping 98% support from pilots' union members, follows two years of contract talks.

This is one of those situations where there is conflicting news -- lower fuel prices, but potentially no pilots -- but the stock rose. I've written before about the financial media's propensity to attribute causes for market movements. Heck, I've done it many times myself: "The stock did such-and-such, following news about such-and-such."

Who knows?

But as an industry, airlines look strong right now, and the fuel-cost development looks likely to help margins. In addition, industry analysts believe that consumers, flush with extra cash that they aren't spending at the gas pump, will start jonesing to fly. I don't know about that; it seems like a stretch to say that consumers will suddenly start flying more for that reason. But I'm not one of those investment-bank analysts who gets paid big bucks to come up with theories like that.

Other industry group leaders include United Continental, Alaska Air Group (ALK), Spirit Airlines (SAVE) and Southwest Airlines (LUV).

So what's the upshot? For me, it's interesting from a business news standpoint, but not actionable ultimately.

Sure, there are ways to invest in the industry, such as the iShares Dow Jones Transportation Average Index Fund (IYT). Despite the strength of certain airline components, the exchange-traded fund has been correcting since early December. With the industry susceptible to fuel prices and economic conditions, I consider it too risky to invest specifically in this narrow sliver of the industrials sector. Even the wider sector is something of a sleeper -- not that trying to time sector strength is really a good idea, either.

Even some "fun" speculation on airline stocks seems ill-advised. Too many of those with the best fundamentals are priced to perfection. If you're scoping out single stocks for speculation, or even to round out a large-cap portfolio, it's best to look elsewhere.

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At the time of publication, Stalter had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Transportation

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