I wrote this week about things that I learned at a Dallas banking conference, and I'd like to wrap up with two final observations -- one involving airline stocks and the other surrounding cybersecurity.
Let's check both out:
Airlines Are Cheap ... So Sell
I flew to Dallas on Southwest Airlines (LUV), which is my favorite carrier because they generally offer competitive fares are don't charge extra to select a seat, check luggage, carry on a bag or breathe the plane's air.
In spite of this, I found my flight to be a miserable experience from start to finish, as the Transportation Security Administration's lines these days are somewhere between a joke and a nightmare.
The TSA says travelers might want to get to the airport three hours before their scheduled flight departures, but I've always had a "six-hour rule" for flying. If I can drive to my destination in six hours or less, I'll usually go by car.
After all, it usually takes at least five hours to go to the airport, get through security, wait for the plane to actually leave, fly to my destination and take ground transportation to my final destination. But flying has become such a miserable experience these days that I might expand my six-hour rule to an eight-hour one.
I mentioned this to a friend recently, suggesting that more Americans will look for alternatives to flying as lines become longer, seats become smaller and extra charges become more frequent. I said that might make this a good time sell airline stocks, but he countered that I'd be silly to do so because carriers are cheap right now, with very low P/E ratios.
Airline P/Es are indeed pretty low at the current moment, but that means to me that it's definitely time to sell.
After all, carriers' stocks have historically performed like auto stocks. When P/Es are low, that usually means airlines are operating under near-perfect conditions -- with high profits and cash flows. They're probably nearing peak profits, so it's time to consider selling or hedging any airline-related stocks that you own.
By contrast, the time to buy airline stocks is when conditions are horrible and P/E ratios are skyrocketing due to reduced or nonexistent profits. In such instances, the sector's outlook is often so dire that shares trade below book value. Financially sound airlines are a great buy when everyone hates the sector.
Consider Southwest in 2009. The stock traded a less than 70% of book value at its low point that year, even though the company had $5 of assets for every $1 of debt on its books.
LUV's debt-to-equity ratio was also just 30% then, meaning that you could have bought the entire company, sold off the planes and other assets, paid off all debts and walked away with a tidy profit. In other words, Southwest was a fantastic buy -- and I investing in the stock and eventually tripled my money.
By contrast, LUV currently trades at about 12x record profits as airlines enjoy the strong tailwinds of low fuel prices, increased business travel and a reduced number of flights (which has created pricing power). Conditions are perfect -- but if we've learned one thing over the years, it's that nothing stays perfect forever.
Fuel prices could go up, the U.S. economy isn't that strong and teleconferencing expands every day (cutting into business travel). There are all sorts of way that airlines' tailwinds could turn into headwinds, so it's probably a good time to take advantage of the sector's temporary "perfection" and take your profits now.
My second observation is one that I've made before and will most assuredly make again: Cybersecurity is the growth industry of the future. It's the "plastics" of the 2020s and beyond.
Every banker I spoke with at the Dallas conference is worried about cybersecurity, and consumers' shift to mobile banking will only increase the threats and potential costs. While banks will be the biggest non-governmental spenders on cybersecurity, almost every industry will face the same concerns that financial-services firms do.
WIllie Sutton said he robbed banks because "that's where the money is" -- and the modern criminal will increasingly turn to cybercrime for the same reason. Our money and just about every other facet of our life are going mobile and into the "cloud," and criminals will attack us there. The companies that protect us from these threats will make a fortune for their investors.
Unisys (UIS) is the only security play that looks cheap enough to buy right now, but I'm spending a lot of time learning about the industry and its publicly traded players. I expect to soon have several at the top of my ever-developing "buy-during-a-crash" list.