“Airlines are far from our favorite investments, as, over the long-term, they generally go nowhere as their business bobs up and down like a yo-yo. However, there are times when the group can do well, and we think now is one of those times, with Alaska Air Group, Inc. (ALK) one of the best performers in the group. The stock is strong for two main reasons.
“First and foremost, the Chapter 11 filing by AMR Corp. (the third largest airline) is helping the entire industry—it appears that company will cut up to 10% of its capacity, which should be a boon to Alaska Air’s western routes; less competition will lead to fuller flights and possibly higher ticket prices. And in an industry that has such high fixed costs, any increase in the top line will drop right to earnings. That leads us to the other reason for the stock’s strength—it’s cheap! Shares trade for south of 10 times earnings, and with AMR’s troubles, it’s likely Alaska’s bottom line is only going to move higher from here. Granted, it’s not a revolutionary story, and it never will be; as an airline, a huge spike in fuel prices or a deep recession could severely depress earnings. But the wind is at the company’s back right now, and should remain so for a few quarters. ... ALK has risen nicely during the past three weeks on well above-average volume. We’re hesitant to chase anything in this tricky market environment, but grabbing some shares on any pullback of a couple of points should work. A drop below 68 or so would be abnormal. Suggested Buy Range: 71-74.”
Michael Cintolo, Cabot Top Ten Trader, 12/19/11
