Stay Away From Airlines

October 9, 2007

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.