The markets have experienced a sizeable rally thanks to new hopes that Europe will finally get a plan together to stabilize the debt crisis and create growth in some areas of the economy. The Dow Jones Index is now back over 13,000 and it is only about 7% off the all-time high. This is quite an achievement considering the level of debt our nations faces, and the still fragile economy in many parts of the world. The recent rally has made it tougher to find really cheap stocks, but there are plenty around, especially if you are willing to be a contrarian and buy when most investors are selling due to short-term challenges.
One stock that bargain-lovers should consider now is United Continental Holdings Inc., (UAL). Like many airline stocks, United shares tumbled in July due to weaker than expected passenger traffic, disappointing earnings, and general concerns over the health of the economy. These are all valid concerns but the sell-off appears to be overdone when you look at fundamentals and the longer-term potential for this industry. Here are a few reasons to consider United for a rebound:
1. Fuel is a major expense for any airline and earlier this year, when oil was surging well over $100 per barrel, this became a major headwind for the sector. Although oil prices are off the recent lows, the price of a barrel is still well below $100. This lower price and recent stability of fuel prices, helps to relieve this challenge for the time being. With many signs of global economic weakness, it is unlikely that oil will move much higher, unless there is a major geopolitical issue.
2. The shares are just way too cheap. In early to mid-July, United shares were trading for over $24 per share. It's not just United, Delta Airlines (DAL) shares have also dropped from about $12 to just around $9 in less than one month. Investors tend to bid stocks up higher than they should when good news is out, but they also tend to take stocks to oversold levels when that momentum turns bearish. That appears to be the case here and the stock now trades for just about $18. While the average stock in the S&P 500 trades for about 13 times earnings, United trades for less than 5 times earnings estimates for 2012, and about 3.5 times 2013 estimates.
3. Earnings look pretty darn good for a stock that is trading at just $18 per share. For the second quarter of 2012, United posted a profit of $545 million or $1.41 per diluted share. This excluded special charges of about $206 million, but even if you include those charges, the company still earned $339 million, or 89 cents per diluted share.
4. United continues to lead the industry and innovate. It recently announced it will take delivery of the state-of-the-art "Dreamliner 787" in September, which is built by Boeing (BA). In the second quarter alone, United launched service to nine new markets, including routes from Washington/Dulles to Honolulu, Dublin and Manchester, England, as well as from Newark to Buenos Aires, Argentina. It also plans to offer Denver to Tokyo nonstop flights in 2013.
United shares seem to have stabilized and are now building a base in the $18 range. (Delta shares also appear to be building a base around $9, and also look poised for a rally.) What is likely to come next is a rebound partially fueled by bargain-hunters as well as shorts. The shorts in this stock have seen some nice gains in the past few weeks, but I expect them to take profits and cover as it becomes more clear that the downtrend has come to an end. Recent data shows about 38.7 million United Airlines shares are short. Based on average daily volume of about 3.8 million shares, it would take about 10 days of trading volume for shorts to cover. At just $18, the stock looks like a good trade in the short-term and a very good long-term value for buy and hold investors.
Key Data Points For United From Yahoo Finance:
Current Share Price: $18.32
52-Week Range: $15.51 to $25.84
2012 Earnings Estimate: $3.66 per share
2013 Earnings Estimate: $5.28 per share
P/E Ratio: less than 5 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.