Should You Bet On Airlines ETF Despite Mixed Earnings?

| About: U.S. Global (JETS)

The airline stocks have been highfliers since the second half of 2015 on dirt cheap oil prices and encouraging fundamentals. Earnings picture was also pretty decent for the space. Higher margin, lower debt, surging ancillary revenues and a host of modifications in operations helped the sector gain altitude (read: Highflier Airlines Earnings : Time for JETS ETF).

As a result, the pure-play aviation ETF U.S. Global Jets ETF (NYSEARCA:JETS) lost just 5.5% (as of January 21, 2016) after accounting for all the global market issues. This was quite respectable when compared with the 11.7% losses put up by the broader market ETF SPDR S&P 500 ETF (NYSEARCA:SPY) in the same timeframe (read: The 13 Best and Most Interesting ETFs to Launch in the First Half of 2015).

In such a backdrop, all eyes were fixed on airlines earnings this season. But sadly, major carriers fell shy of investors' expectations. Greenback strength appears to be main reason behind this underperformance.

Q4 Results in Detail

The season unveiled with Delta Air Lines (NYSE:DAL) missing on both lines in Q4 of 2015. Results were hurt by the strength in the U.S. dollar, with foreign currency movements having an adverse impact of $160 million.

However, Delta's shares added 3.3% despite the earnings miss in the key trading session of January 19. This is because the company, the bottom line of which grew 51% year over year on low oil costs, expects to generate over $3 billion in savings in 2016 on steeply plunging oil prices.

This Zacks ETF Rank #1 (Strong Buy) stock has a Zacks Momentum & Value style score of 'A' and a Growth score of 'B', at the time of writing.

United Continental (NYSE:UAL) also came up with soft Q4 results this month as both earnings and revenues miss. Adjusted earnings were up substantially year over year on lower fuel costs. Revenues declined 3% on lower passenger revenues. Cargo revenues were also downhill while the other revenues improved 10.9%. However, its indicators are promising with a Zacks ETF Rank #2 (Buy), and Value score of 'A' and Momentum score of 'B'. Shares also added modest gains of about 0.5% to close January 21, the day it reported earnings.

Yet another leading U.S. carrier Southwest Airlines Co.'s (NYSE:LUV) fourth-quarter 2015 bottom line matched the Zacks Consensus Estimate while the top line missed the same. But investors should notice that revenues grew 7.5% year over year helped by 3.3% and 119% expansion in Passenger and Other revenues, respectively. This Zacks ETF Rank #1 stock also boasts hopeful indicators of Momentum score of 'A' each and a Value score of 'B'. LUV was up 0.5% post reporting earnings.

Though these heavy-weight companies underperformed on earnings, the sector has seen sturdy performances by others. Alaska Air Group Inc. (NYSE:ALK) reported earnings (on an adjusted basis) of $1.46 per share in the fourth quarter, beating the Zacks Consensus Estimate of $1.43. Earnings increased 55% year over year.

Revenues of $1.38 billion were in line with the Zacks Consensus Estimate. The top line grew 5% on a year-over-year basis. The company also hiked its quarterly dividend by 38% to $0.275 per share. This star performance within the struggling pack offered the stock over 8.1% gains post earnings. ALK has a Zacks ETF Rank #1, a Value and Growth scores of 'B' and a Momentum score of 'A'.

Should You Buy JETS?

By now, one must have realized from the indicators that the mood in the airlines industry is upbeat. The sector is in the top 4% category of the Zacks Industry Rank at the time of writing, giving strong cues of the upcoming flight in the entire industry.

However, as company-specific risks seem higher, investors might play the trend via basket approach to tap the entire potential of the space. And to do so, what could be a better option other than the JETS ETF?

The $46.8 million-fund holds over 30 stocks in its portfolio and is concentrated on a few individual securities, as it allocates about 70% to the top 10 holdings. American Airlines (12.46%), Southwest Airlines (12.37%), Delta Airlines (12.13%) and United Continental (10.54%) are the top four elements in the basket. Alaska Air holds the ninth position in the fund with 3.74% weight. The product charges 60 bps in fees.

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