Few companies are more friendless than airlines. Their customers dislike them because of high-ticket prices, legroom that could make the shortest person feel confined, endless fees and generally unpleasant flying conditions.
Investors are often not much happier. As Warren Buffett once said, "If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot down Orville Wright. He would have saved his progeny money."
An irony of the airline industry is that so many businesses that feed off it, including airplane manufacturers, oil companies, catering companies, airports, jet engine makers, hotels, can consistently make money, while the airlines ¿ the ones who actually move people ¿ have trouble making a buck.
Right now, airlines are profitable because, in part, ticket prices have generally remained high while fuel prices have fallen. Airlines have also cut back on flights to make remaining flights more efficient (and more crowded). Lots of fees have also boosted the airlines' bottom lines.
Do not give up on airlines as an investment, however. Specifically, there is one player in the industry worth paying attention to: Alaska Air Group (ALK). Despite its name, it is Seattle based, and flies primarily along the West Coast as well as in Alaska and a number of other states, plus Canada and Mexico. To choose stocks to recommend, I rely on strategies I modeled after how well-known investors make decisions on where to place their money.
One of these strategies is based on the writings of Peter Lynch, perhaps the greatest mutual fund manager of his time. He relied on the PEG ratio, which is price-to-earnings relative to growth, and is a means to measure how much the investor is paying for growth. A PEG of 1.0 or less is acceptable, and below 0.50 is considered very strong. Alaska Air is in this very strong group, with a PEG of just 0.42. If you buy into Alaska Air, you are getting a good deal on it growth prospects.
Another company worth thinking about is not an airline but provides product to the airlines: Exxon Mobil (XOM). While the oil companies have been battered of late by falling prices, Exxon, the world's largest publicly-traded oil company, is considered a good investment at this time by my James P. O'Shaughnessy-based strategy. It likes the company's huge market cap ($352 billion), strong cash flow per share ($12.13), large number of shares outstanding (4.2 billion) and massive 12-month sales ($394 billion). The strategy takes all companies that pass these tests and picks the top 50 based on their dividend yield. With a current 3.28% yield, Exxon is in the top-50 group of stocks.
