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I got bullish on the airlines back in September and of the picks I have made thus far, these were the most profitable to me (and hopefully to others). The basis of the call was on oil and the sector took off after the market missed the idea that crude could fall (many analysts had modeled in $69/barrel for the fall).

The names mentioned, CAL, AMR and LCC have performed very well. I later added UAUA because it was cheap compared to the group. In looking at valuation only, the names continue to trade cheap to growth. However, given my thinking that the oil market could go sideways over the next 5-8 months, we could see the potential oil story (the one where oil continues to fall) abate and focus shifts and holds on RASM growth, which I think is the best driver of the names. Here is a rundown of each company mentioned previously as a buy.

American Airlines (AMR)
AMR continues to be a cheap stock relative to its growth rate continuing to beat expectations as the last four reports illustrate. Perhaps there is more room to run given the level of short interest sits near 11%! Technically, buying power remains in control and the power model remains steady though has wavered of late. Trading wise, I would have lightened up on the position by a third in late November. In addition, I would have cut back another third right before Christmas but due to the move higher last week I would have reentered that portion on a stop. I think there is still upside to the earnings picture but to a lesser extent than before. I would remove another third of the position if the company closed below $30.64.

Continental Airlines (CAL)

Of the four names mentioned here, CAL has the highest forward multiple at 8.08x earnings. The forward PEG continues to be attractive and the level of short interest appears to support higher prices. Also, the company has not missed its last four earnings reports and recent RASM numbers showed improvement. Technically, the power model is picking up steam that supports the stock higher (even as it feels stalled at the moment). The Buying pressure model is at its best levels since the 1990’s much like the breakout in 1995 (with selling pressure going nowhere). Like AMR, I would have taken a third off this stock back in late November holding the rest. I would remove another third of the position if the company closed below $41.27.

US Airways (LCC)
LCC is the second cheapest of the four names mentioned here at 7.87x forward earnings. The forward growth rate is the slowest of the bunch at only 35% but given the leverage to oil, lower prices clearly favor LCC (.13/share per $1). The earnings yield is also very strong at 12.7% which is about the average of this group. Forward PEG is very strong. Technically, buying pressure is unwinding just a bit on the most recent run higher over the last few months. Power models are also choppy as well. Like the other two names, I would have been inclined to take a third of the position off in late November holding the rest. I would remove another third of the position if the company closed below $53.29.

UAL Corp (UAUA)

UAL is a cheap stock that has been making a habit of missing earnings. This perhaps has kept a lid on the stock while the others took off though of late, it has been playing catch-up. Earnings power here is strong but the analyst community continues to miss on average where the company will report. This company is the most expensive of the group and has the lowest earnings yield. The forward PEG though is appealing. Technically the power model is very strong and holding higher. As for the long term trends, buying pressure remains strong though a double top is in play at the moment. Like the others, I would have been inclined to cut back a third at the end of November and would have held the rest. I would remove another third of the position if the company closed below $43.11.

CAL vs. LCC vs. UAUA vs. AMR 1-yr chart

CAL LCC UAUA AMR chart

Source: Crude's Fall Boosted Airline Stocks