As the market has printed new highs on a daily basis this week, we have reminded readers that there is a big difference between a bull market and market rally. Bear market rallies often happen when the stock market is so oversold that short sellers or deep value investors feel they have to be buyers. True bull market rallies depend on leadership from sectors. One sector that has helped lead the charge to a new high for the Dow Jones Industrial Average is the transports.
In a report out today, analysts at UBS A.G. (NYSE: UBS) declare there is plenty of upside left for the U.S. airline sector. Warren Buffett of Berkshire Hathaway Inc. (NYSE: BRK-A) has said for years now that if he ever gets the urge to buy an airline that he has people inside Berkshire Hathaway instructed to override him on it. UBS is calling Buffett out in this call.
U.S. airline stocks have been on a tear, up almost 50% in the past 12 months and about 25% year to date. Some of the performance can be explained by the market’s 14% rise and Brent oil’s 11% drop, but the team at UBS believe investors are finally taking notice of the improved fundamentals in the sector. The question becomes, where to from here?
Traditionally most “investors” in airline stocks have had such a short time-horizon that they could more accurately be described as traders than investors. This approach made sense because, over time, most airlines operated at a loss, burned cash, destroyed value and diluted shareholders. You cannot be a successful long-term investor in a sector or stock that is consistently spiralling toward bankruptcy. The UBS team thinks that now may be the time to invest rather than trade airline stocks.
Today, Delta Air Lines Inc. (NYSE: DAL) is added to the UBS Key Call list. Analysts at UBS believe Delta it is the best positioned airline stock due to:
- A strong post-merger competitive position, which is facilitating better-than-peer revenue trends;
- Constrained capital spending, growing free cash flow and a possible dividend announcement;
- Management’s plan to decrease unit costs excluding fuel after 2013; and
- The industry’s heightened focus on capacity constraint and shareholders.
Closing yesterday at $15.90, Delta has a Thomson/First Call consensus price target is $17.00.
UBS also upgrades Southwest Airlines Co. (NYSE: LUV) from Neutral to Buy. This low-cost domestic leader has been mired in a sideways trading pattern for years. Although off the $8 lows, any breakout on volume may take the stock significantly higher. The the Wall St. estimate is $14.
The United Continental Holdings Inc. (NYSE: UAL) merger of United and Continental mirrored the current merger between U.S. Airways Group Inc. (NYSE: LCC) and the now bankrupt AMR Corp. Two powerhouse airlines with substantial gate presence both domestically and internationally will combine. Competition tends to ratchet down and prices go up after big mergers. Many Wall St. firms believe U.S. Airways is now poised to become a strong presence, not only in Europe but also South America. The consensus estimate for the stock is $18.50. That could provide investors with a nice gain from yesterdays $14.82 close.
We have stressed to 24/7 readers the significance of the transports strength as a sector, and what it may mean for a continued rally in the overall market. Just this week we wrote about how the air cargo, railroad and truckers are helping to fuel the rise in the transports from a call by Oppenheimer.
Investors wanting to participate in the rally should keep a close eye on the transport sector. If it starts to roll over and decline, the rest of the broad market is likely to follow.
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