How to Invest in Airline Stocks in 2017
A Special Report from our Associates at Money Morning:
Airline stocks may be popular investments in 2017, but we do not recommend adding them to your portfolio. Just take a look at the trading volume of airline stocks, and you can see their popularity.
JetBlue Airways Corp. (Nasdaq: JBLU), a company with a $7.6 billion market cap, has an average trading volume of 4.6 million shares per day. Meanwhile, Amazon.com Inc. (Nasdaq: AMZN) and its $445 billion market cap sees an average of 3.6 million shares changing hands per day.
While we don't recommend buying airline stocks, Money Morning experts have found a way to play the popularity of the airline industry. In fact, the stock we're going to show you today could climb another 16% in 2017, and it pays a dividend with a nearly 3% yield. That adds to the 204.5% gain the stock has returned since we initially recommended it back in 2011.
So why are we targeting this sector if airline stocks aren't good investments?
You see, airline demand keeps climbing. And our play will allow you to cash in on the increasing demand without buying into risky airline stocks.
U.S. airline passenger traffic has increased steadily since 2009, when it fell following the financial crisis. Last summer, the peak was 91 million passengers in July, according to FactSet. In July of 2009, there were 77 million passengers flying. That is an increase of 18% in seven years.
Another way to measure increasing demand is through "revenue passenger miles" (RPM). RPM is found by multiplying the distance the plane travels by the number of paying passengers on board.
Between 2015 and 2016, global RPM increased 5.8%. And RPM has grown 13 of the last 15 years. The only two years it did not grow were during the 2008/2009 financial crisis. Even though air travel is expanding, there's one major reason airline stocks are not the best way to play this demand...
Why We Don't Like Airline Stocks in 2017
The main reason we don't like airline stocks is the threat of "black swan events." These are unexpected events that negatively impact the markets. Often times, these events affect airline stocks much more negatively than the overall markets. That can be seen in the five examples of black swan events below.
- Terrorism: After the Sept. 11, 2001, terrorist attack, all flights in and to the United States and Canada were grounded for two days. The NYSE ARCA Airline Index (INDEXNYSEGIS: XAL) lost 46.4% between Sept. 11 and Sept. 21. The Dow also plunged because of the terrorist attack, but it only lost 14.3% over the same time period. On top of airline stocks plummeting, there was a major overhaul to the rules for flying. It took until March 2002 for airline stocks to mostly recover (getting to 6.6% shy of pre-attack levels), while the Dow took only two months to get back to pre-attack levels. The Airline Index is currently trading for $117, which is the same level it was trading at just before the attacks. It has taken until now to get back to those levels. While no one can predict if/when a terrorist attack will take place, these numbers show how airline stocks are disproportionately affected by these events.
- Disease: The Ebola outbreak began in February 2016 and peaked in October 2016. Between Sept. 5, when travel fears were reaching its peak, and Oct. 10, when international communities started to contain the outbreak, the NYSE ARCA Airline Index lost 13%. The Dow was only 3% lower over that time period. Again, no one can predict the next disease outbreak, but the past 15 years have seen several outbreaks including Zika (2016), swine flu (2009), and avian flu (2003).
- Customer Service Debacles: On April 10, a video of a man being dragged off of an overbooked United Continental Holdings Inc. (NYSE: UAL) flight went viral. After the incident the stock saw 17.7 million shares trade hands the next day. That's almost six times the average trading volume of 3.3 million for United. The selloff resulted in a 3.5% decline in United stock between April 11 and April 13.
- Brexit: On June 23, 2016, Britain voted to leave the EU. Between June 23 and June 27, the NYSE ARCA Airline Index lost 8.4% while the Dow only lost 4.8%. The uncertainty surrounding the vote's impact on international travel is likely the cause of the much larger drop for airlines.
- Volcanic Eruptions: While this may seem off the wall, one happened in 2010 and caused about 10 million people to be stranded globally. In 2010, an Icelandic volcano erupted, disrupting air travel for eight days between April 15 and 23. More than 95,000 flights (48% of all air traffic globally) were canceled during the eight-day closure of airspace over Europe, according to the International Air Transport Association, costing airlines an estimated $1.7 billion. Between April 16, 2010, and May 7, 2010, Delta Air Lines lost 19.8% while the Dow lost 5.6%.
Another event that is likely to cause uncertainty in airline stocks this year is the reemergence of Zika virus news. The effect of Zika on the airlines will be hard to predict until the Center for Disease Control (CDC) has a better idea of how fast the virus will spread this summer.
In January 2016, Delta Air Lines Inc. (NYSE: DAL) stock dropped 6% because of Zika fears after CDC recommended that pregnant women should avoid going to Caribbean destinations as well as Latin America.
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While these events caused the airline stocks to plummet, they didn't deter global air travel demand long term, as the FactSet data showed earlier.
With the huge potential for airlines to be negatively impacted at any given time, they can wreak havoc on your portfolio. Because of that, we recommend investing in an industry supplier instead of airline stocks directly. This allows you to play the increasing demand of the airline industry without investing directly in airline stocks.
And this industry supplier's stock could set a new all-time high in 2017......
Invest in This Airline Industry Supplier Stock for 16% Gains in 2017
Boeing Co. (NYSE: BA) supplies the airlines with the jets they use, and the company has 43% of the commercial jet market. This makes Boeing a stable force in the airline industry.
The stock hit an all-time, intra-day high of $190.70 on June 2. Since then, it has traded just below that level at $189.52. One analyst following Boeing expects it to reach $220 a share within a year. That would be a gain of 16% before the dividend is factored into the return. And we expect the company's stock price to rise faster than 16%.
One of the reasons Money Morning Executive Editor Bill Patalon likes Boeing is its 3% dividend. The large dividend dramatically increases your return and can help provide investment income that you can likely count on for the foreseeable future. The company has paid a quarterly dividend for the past 30 years, giving it a reliable track record.
"This is a company that has a proven record of taking that cash flow and giving it back to shareholders in the form of dividends, stock buybacks, and other kings of financial engineering." Patalon said in February. This return of cash flow to investors will compound your return.
Patalon recommended Boeing stock back in September 2011. Since then, the stock has gained over 200% before dividends are factored into the return, while the Dow has only gained about half that much at 97%.
Not to mention that the company is priced more cheaply than the market as a whole, giving it a lot of room for fast growth. Currently, Boeing has a price per earnings (P/E) ratio of 22.7 while the S&P 500 has a P/E ratio of 25.35 on average.
The last reason Patalon likes Boeing is its backlog. Currently, the company's backlog is 5,646 planes. Boeing delivered 56 aircraft in April and 56 aircraft in May, meaning the company has an eight-year list of orders to fulfill, which will keep revenue stable for years to come.
The Bottom Line: Air travel isn't going anywhere. But the best way to profit from the industry is to invest in Boeing. Boeing stock could climb another 15% in 2017, and it also offers a 3% dividend yield.