Mega Funds' Top Airline Value Buys

by: GuruFundPicks

The airline and air travel services companies have been volatile recently, triggered by a multitude of factors, including the bankruptcy of American Airlines parent AMR Corp. (NASDAQ:AMR), the news flow on Europe’s sovereign debt crisis and the outlook for the global economy, political upheavals in North Africa and Europe, and the recent surge in fuel prices. Overall, the airline industry as represented by the AMEX Airline Index (XAL) has been very weak this year, down over a third since peaking last November.

In this article, via an analysis based on the latest available Q3 institutional 13-F filings of the investing activities of the world largest fund managers managing between $100 billion and over a trillion dollars, we identify the airline and air travel service group companies that are being accumulated and those being distributed by these mega managers. Taken together, these mega managers are bullish on the group, adding $1.1 billion to their prior $47.7 billion holdings in the group, and they are also equal-weight the group.

The following are the airline group companies that mega fund managers are bullish about, and that are also trading at a discount to their peers in the group (see table):

JetBlue Airways Corp. (NASDAQ:JBLU) provides passenger airline service to 63 destinations in 21 states, Puerto Rico, and Mexico; and 10 countries in the Caribbean and Latin America. Mega funds added a net $47 million in Q3, and they hold an outsized 47% of the outstanding shares. The largest mega fund buyer in Q3 was Goldman Sachs that initiated a new $97 million position in the quarter.

JBLU has been in a strong rally mode recently, up about 50% in the last two weeks, boosted by positive comments by analysts and the expectation that it would be among the big winners in an AMR bankruptcy. Currently, after the recent surge, it still trades at a slight discount at 10 forward P/E and 0.8 P/B compared to the averages of 11.0 and 1.6 respectively for its peers in the airline group, and can be considered attractive on a relative basis, especially on a pullback. International ADR (NASDAQ:CTRP) is a China-based consolidator of hotel accommodations, airline tickets and packaged tours targeting individual business and leisure travelers in China. Mega funds added a net $73 million in Q3, and they also hold an outsized 39% of the outstanding shares versus their 32% weighting in the group. The largest mega fund buyers in Q3 were Oppenheimer Funds ($85 million) and Fidelity Investments ($80 million). CTRP currently trades at the lows of the year, and has been in serious pullback mode after they forecast a drop in Q4 margins on November 14.

It currently trades at a discount 18 forward P/E and 3.1 P/B compared to averages of 70.5 and 5.4 respectively for its peers in the Internet commerce group. With the growth of the Chinese travel market behind it and trading at 52-week lows, this seems like an attractive play, but we would wait on the sidelines until margin growth is resumed. Inc. (PCLN), the pioneer of name-your-own price service, is a diversified online travel services company. It provides airline ticket, hotel room, car rental, vacation package, and cruise services through Mega funds added a net $502 million in Q3, and the top mega fund buyer was T Rowe Price ($548 million). PCLN trades at an attractive 16 forward P/E and 10.0 P/B compared to averages of 70.5 and 5.4 respectively for its peers in the Internet commerce group.

Its shares have been weak recently after it reported soft guidance for Q4 in its Q3 report on November 7, but the company is still in strong bull mode as revenue and margin growth continues to be outstanding, and we would look at any pullback in this premium company as an opportunity to buy.

Delta Air Lines Inc. (NYSE:DAL) provides international and domestic passenger and cargo transportation in the U.S. and abroad, offering services to 357 destinations in 66 countries. Mega funds added a net $47 million in Q3, the second consecutive quarter they accumulated since we started tracking, adding $78 million in the prior quarter. The top mega fund buyer was Janus Capital Management ($118 million).

DAL stock has been trading near the lows for a few months now, at a very attractive discount of 3-4 forward P/E and 5.7 P/B compared to averages of 11.0 and 1.6 respectively for its peers in the airline group. What DAL has needed is a catalyst to spring some life back into its shares, and recent speculation that it would be a prime beneficiary as AMR sheds capacity in its bankruptcy may be just what they need.

The following are airline and air travel service companies that mega funds are bearish about (see table):

AMR Corp. (AMR) provides air transportation for passengers to 160 destinations in North and South America, Europe and Asia. It also operates as a scheduled air freight carrier, providing a range of freight and mail services to shippers. Mega funds cut a net $1 million in Q3, and are under-weight the company, holding 23% of the outstanding shares.

AMR recently filed for Chapter 11 bankruptcy filing on November 29; however, after an initial huge gap-down open, shares rallied and almost tripled and are still trading at over 60c even though it is obvious that equity holders will be wiped out eventually. We would not go near this one, and not play this game of buying to find if someone even more stupid buys it even higher.

Southwest Airlines Co. (NYSE:LUV) provides predominantly short-haul, high-frequency, point-to-point, low-fare domestic airline service to 69 cities in 35 states. Mega funds cut a net $70 million in Q3, the second consecutive quarter they cut, following a cut of $7 million in the prior quarter. The top seller was Fidelity Investments ($52 million).

LUV shares have been trading near their lows for the last few months, at an 11 forward P/E and 1.0 P/B compared to averages of 11.0 and 1.6 respectively for its peers in the airline group. This former high-flyer has been stuck in low-growth mode, however a multitude of analysts have provided support to the stock, some opining that the stock is a buy given its proven ability to outperform during slow periods.

United Continental Holdings (NYSE:UAL) provides air transportation for passengers, freight and mail with over 5,675 flights daily to over 372 airports on six continents. Mega funds cut a net $90 million in Q3, and the top seller was Janus Capital Management ($109 million). UAL shares trade at a very attractive 3-4 forward P/E and 2.8 P/B compared to averages of 11.0 and 1.6 respectively for its peers in the airline group. A number of analysts, including at Triconderoga and JP Morgan, have recently come out in support of the stock. We agree that the stock is attractive on a relative valuation basis.

Other companies that mega funds accumulated in Q3 (see table) include the aircraft manufacturer Boeing Co. (NYSE:BA), in which they added $536 million; US Airways Group Inc. (LCC), in which they added $11 million; and online air travel services provider Expedia Inc. (NASDAQ:EXPE), in which they added $33 million.

Click to enlarge.

Note on Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market caps. That way, the list is not biased towards the largest companies in the group.

General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others.

These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.

Credit: Fundamental data in this article were based on SEC filings, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.