Stay Away From Airlines

A major part of investing has to do with picking quality companies. Once you pick a quality company, you have to have good timing and decide when to buy into the company. Another important part of investing is to know what sectors/industries to stay away from. Sectors that have uncertain growth or have a lot of negative news should be kept on the investment sidelines.

The major sector that I’m staying away from is airlines, especially in China. The Chinese airlines include China Eastern Airlines (CEA) and China Southern Airlines (ZNH). China Eastern Airlines hit a high of $147 in the third week of September and has dropped to its current level of $95. The $50 drop has occurred in response to the news that Cathay Pacific Airways decided not to challenge Singapore Airlines in a bid for China’s third largest airline. With takeover battles being discouraged for Chinese airline companies and oil prices consistently in the $80 range, it sets up a bad equation for China airline stocks. US airline companies may not have the drastic year-to-date stock price increases compared to the Chinese counterparts, but they still have to deal with the high oil prices and a slowing US economy. Some of those US companies include Southwest Airlines (LUV), Continental Airlines (CAL), and Jet Blue Airways (JBLU) with Jet Blue taking the largest percentage drop.

Yes, people will need to fly, but with financial analysts predicting $100/barrel oil in the next couple years, that doesn’t bode well for airline stocks in any country. China Eastern Airlines also carries a debt-to-equity ratio over 16 and a negative EPS for the next quarter. I don’t expect airline stocks to take off anytime soon so look to the energy sector, casinos, wireless technology, and green energy for stocks that actually have a chance of flying.


2 Responses to Stay Away From Airlines

  1. tao2death says:

    What about more quality airlines like UAUA, AMR, and LCC? Have you read this viewpoint? Discount airlines like LUV and JBLU have profits more readily tied into gas prices as they operate on thin margins, but many of the legacy airlines are making far more profits on similar load factors because they operate on the very profitable international routes. Although I mostly agree that now is not the time to get into the airline sector. A lot of them are taking their profits and heading into a capital expenditures fleet replacement cycle. It’s actually almost time for me to take my 40% gains on UAUA off the table. Right after they beat their 3Q earnings estimate.

  2. […] so you better satisfy the customer or they’ll stay home.   In previous entries, I advised to stay away from airlines and stay away from homebuilders.  I was very on target with both those sectors and I foresee it […]

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