The shares of this airline were recently upgraded by Deutsche Bank to ‘Buy.’
United Airlines Holdings, Inc. (UAL)
From David C. Jennett’s Investment Letter
Those who wish to spread fear and loathing by insisting that stocks are epically overvalued do not seem to grasp just how explosive growth can be. Even with the modest rise in stock prices since the start of this year, there is every reason to believe that the price/earnings ratio for the S&P 500 will return to pre-COVID-19 levels by year’s end. Yes, this means that the market multiple might still be around 21 come December 31, 2021, but let’s be honest. Even if the Fed sees the light and stands aside as the 10-year climbs back towards 3%, a market multiple around 20 is not exceptional.
Throughout this whole mania regarding the need to keep long-term rates low, we seem to have forgotten that the interest rate on the 10-year US Treasury bond climbed from 1.5% in July 2016 to 3% in mid-2108. The S&P 500 Index managed to climb from 2100 to 2900 during that period. That’s a 38% increase in stock prices—during a time of rising long-term interest rates.
If you stop to think about it, this makes perfect sense. What makes rates move higher during a period of low inflation? There is only one reason for that to happen. Demand for money ratchets upward. The economy is growing, unemployment is falling, and life is good. Corporate profits boom, and so does the stock market.
We do not need to fear higher rates; we need only be sure they are rising for the right reason. Sooner or later—and my guess is it will be sooner—Wall Street will tire of the narrative that the Fed is creating runaway inflation. When that happens, they will turn their gaze to the growing strength of the economy and the potential that holds for better than expected corporate profits.
That is the classic formula for rising stock prices. Those who position themselves for such a possibility will be the ones who benefit the most.
I wish to put some money into one last American firm that has not yet fully participated in the so-called reopening trade here in the US. Although the share price of United Airlines Holdings has doubled since it bottomed out last March, it remains well below pre-pandemic levels.
It is the only major US airline that has failed to recover to new highs. I will add UAL to our portfolio this month, with the understanding that airline stocks do not fit my usual buy-and-hold approach. If these shares rally towards new highs, I will take my capital gain and find a long-term investment to take its place.
David C. Jennett, The Investment Letter, P.O. Box 6170, Holliston, MA 01746, 800-542-5018, March 17, 2021