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Stocks  | December 30, 2020

Year 2020 was one of the worst periods for the airline industry as the coronavirus crisis battered travel worldwide and practically forced the $1.7 trillion industry to halt in the U.S. However, with coronavirus vaccines getting ready for mass distribution, analysts believe that the industry will see a revival in 2021. Major airline stocks will continue to see the negative effects of the coronavirus crisis in months to come, which presents a solid investment opportunity for long-term investors.

The airline industry recently breathed a sigh of relief after the Congress approved the $900 billion COVID-19 stimulus package, which includes the Payroll Support Program for the airline companies. The program allocates $15 billion for the airline companies to bring back furloughed workers.

The airline industry plays a key role in the economy. According to IATA, passenger air transport was down 90% year-on-year in April 2020 and down 75% in August. According to an estimate, by the end of 2020, job losses in the airline industry are expected to reach 90,000, including more than 30,000 furloughs. All major airlines, including United Airlines Holdings Inc (NASDAQ: UAL), American Airlines Group Inc (NASDAQ: AAL), Southwest Airlines Co (NYSE: LUV) and Delta Air Lines, Inc. (NYSE: DAL) have cut jobs due to the coronavirus crisis and warned of further downsizing and harsh measures in the coming months. According to data from Airlines for America, a trade group, the industry’s workforce in the fourth quarter will fall to about 370,000 full-time equivalent jobs, down from 460,000 jobs in March.

Are Airline Stocks Risky?

Airline stocks are always tricky mainly due to the volatile nature of the industry and low margins. However, U.S. airline companies showed consistent growth over the last 10 years before the pandemic hit. Unlike in Europe, this growth was possible in the U.S. because of mergers, collaborations and partnerships between big airline companies. Airline stocks performed so well that legendary investor Warren Buffett – who famously used to scorn airline stocks – took a U-Turn and brought millions of airline stocks back in 2016. The Oracle of Omaha, however, sold all of his airline stakes in 2020, citing the coronavirus crisis.

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However, a widespread availability of vaccine and ease of restrictions worldwide are bound to push airline stocks higher. In fact, The Dow Jones U.S. Airlines Index is up over 24% over the last 3 months. But it’s still down 32% year to date. All major airline stocks in the US are down year to date – American Airlines (- 46%), Southwest Airline (-17%), United Airline (-52%) and Delta (-32%). This presents a solid investment opportunity.

In September, Morgan Stanley analyst Ravi Shanker gave a bullish outlook for the broader airline industry, citing strong chances of life coming back to normal following a vaccine. Shanker said that travel will start getting back to normal in late 2021- early 2022. He believes that revenue passenger miles (RPMs) will revive to 2019 levels exiting 2021 and entering 2022.

Turbulence Ahead

However, investing in airline stocks in 2021 won’t be easier. Airline companies have racked up huge debts to fly through the dark clouds of the coronavirus crisis. For example, American Airlines secured a $5.5 billion term loan facility from the Treasury Department using its frequent flier program as collateral. In September, Delta Airlines borrowed a whopping $9 billion in the industry’s largest debt sale ever. Other major airlines are drowning in debt too. When the bills from lenders come due, only the airlines with robust fundamentals and strong base will be able to sustain growth. A lot factors come into play while evaluating an airline stock, including daily cash burn rate, debt, earnings before debt interest, taxes, depreciation, amortization and rents paid to lease aircraft.

It's not just the airline industry that is becoming volatile. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 78 percentage points since March 2017. We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Hope is On the Horizon

Business travel, which accounts for over 70% of profits of the travel industry, is also expected to be back to normal in the next 2-3 years. In a survey, over 48% experts and business executives said that it will take about 3 years for business travel to get back to pre-pandemic levels. These experts manage daily business activities and travel budgets for major companies worldwide.

Moody’s on Dec. 12 gave a stable outlook for the global transportation sector, which includes the airline industry. The ratings agency said that the global passenger airline industry will see an aggregate operating margin of about 8.9% in 2020, down slightly from 9.3% in 2019.

"We expect that a combination of passenger volume growth, ongoing capacity discipline and steady fuel costs will alleviate pressure on operating margins for the global airline industry in the coming year. Of the three factors, however, we see slightly lower fuel prices as key for holding, if not growing, operating margins because of sustained pressure on non-fuel costs,” Moody’s said.

Let's analyze the 10 best airline stocks to buy for 2021, based on the data of 816 elite hedge funds tracked by Insider Monkey. We also take into account the fundamentals, future outlook and growth catalysts while choosing these stocks.

10. Ryanair Holdings plc (NASDAQ: RYAAY)

Ryanair is an Ireland-based airline popular for its low-cost flights. The stock has gained over 20% year to date, indicating the company’s resilience in the midst of the coronavirus crisis. Natixis Global Asset Management’s Harris Associates is the biggest stakeholder of Ryanair in our database with 9.30 million shares. Legendary investor and mathematician Jim Simons’ Renaissance Technologies is also bullish on Ryanair, with 2.97 million shares, worth $243.25 million. Overall, 16 hedge funds in our database had positions in Ryanair as of the end of the third quarter.

Ryanair recently said it will order 75 additional 737 MAX jets.

In November, the company posted a loss for its key summer period for the first time in decades. For the month of November, Ryanair reported a traffic decline of 82%.

9. JetBlue Airways Corporation (NASDAQ: JBLU)

JetBlue ranks 9th on the list of best airline stocks to buy for 2021. The airline is currently facing turbulence due to falling demand worldwide. Earlier in December, JetBlue Airways priced its upsized underwritten offering of 36.5 million shares at $14.40 per share. In the third quarter, the company beat analysts’ forecasts for its Q3 Non-GAAP EPS and GAAP EPS. Revenue came in at $492 million, down 76% on a year-over-year basis.

The company expects its fourth quarter revenue to fall by 70% year over year.

A total of 23 hedge funds tracked by Insider Monkey held long positions in JetBlue in the third quarter, down from 28 funds in the second quarter. However, the total worth of the investments increased to $149.92 million from $131.83 million.

8. Allegiant Travel Company (NASDAQ: ALGT)

Allegiant is a Las Vegas, Nevada-based low-cost airliner. Allegiant shares are up by 1.8% year to date. In October, the company reported a $29.1 million loss for the September quarter, compared with a $43.9 million profit during the same period last year.

The company’s revenue plummeted 54% in the period, but CEO Maurice Gallagher said he is hopeful of a recovery as gross bookings increased from an average of about $2 million per day in the third quarter to more than $3 million per day in the fourth quarter.

Out of the 816 elite hedge funds tracked by Insider Monkey, 24 reported owning stakes in Allegiant as of the end of the third quarter, up from 23 funds a quarter earlier. The total worth of these stakes is $344.08 million.

7. Spirit Airlines Incorporated (NYSE: SAVE)

Spirit ranks 7th on the list of best airline stocks to buy for 2021. A total of 27 hedge funds in our database of 816 funds held stakes in Spirit as of the end of the third quarter of 2020, up from 23 funds in the previous quarter. The total worth of these investments is $156.82 million.

Spirit shares are down close to 40% year to date. The company on Dec. 3 said it expects significant pressure on ticket revenue per passenger flight segment in the fourth quarter due to continuing decline in travel amid the coronavirus pandemic. The company also expects non-ticket revenue per passenger flight segment to be down modestly in the fourth quarter.

In October, Spirit stock was upgraded by JPMorgan to Overweight following the company’s fourth-quarter results and better-than-expected metrics. However, the firm downgraded the stock on Dec. 16 citing fresh concerns on recovery.

6. Atlas Air Worldwide Holdings, Inc. (NASDAQ: AAWW)

Unlike other airlines, the coronavirus crisis boosted Atlas Air stock. That’s because the company is primarily a cargo airliner. Cargo airlines saw a huge jump in business after passenger plane flights suspensions following the pandemic. Atlas Air stock has jumped over 102% year to date. The company, which also operates flights for Amazon’s shipments, swung to a profit of $23.4 million in the first quarter from a loss of $30 million in the same period a year ago.

David Einhorn’s Greenlight Capital is one of the 27 hedge funds having positions in Atlas Air. As of the end of the third quarter, the fund reporting owning 1.51 million shares of Atlas, worth $91.72 million. Here is what Einhorn said about AAWW in his Q2 investor letter:

“We also added a new large equity position in Atlas Air Worldwide Holdings (AAWW) at an average price of $36.28. AAWW operates the world’s largest fleet of Boeing 747 freighters and is a sizable owner, operator and lessor of 767, 777 and 737 freighters.

Prior to COVID-19, approximately 50% of global airfreight was carried in the belly of passenger planes, mostly on long-haul international flights. With long-haul international passenger traffic down more than 90% year-over-year (and likely to be the last segment of passenger travel to recover), there is a historic shortage of airfreight capacity. After an initial surge in demand to ship Personal Protective Equipment (“PPE”), the market is transitioning back towards more traditional airfreight products such as electronics, capital goods, perishables and pharmaceuticals. Market shipping rates increased by over 100% year-overyear in the second quarter and are expected to remain strong. As a result, we expect AAWW to see significant growth in earnings per share in 2020 (from the $5.24 it earned in 2019).

In response to the capacity shortage, some passenger widebodies are temporarily operating as freighters (nicknamed “preighters”), particularly to fulfill urgent PPE demand. However, due to lower cargo capacity, more cumbersome loading and unloading and similar overall trip costs, preighters cost roughly 2.5x as much per ton shipped compared to dedicated freighters. Preighter activity departing from China and Hong Kong has already declined by more than 50% since May as shipping rates have partially normalized. Over the next three years, we don’t expect many large freighters to be either produced or converted from passenger service given the cost and lead-times involved.

While most of the increase in earnings will occur in AAWW’s charter segment, AAWW also has attractive and substantial long-term contractual relationships serving DHL and Amazon, which stand to benefit from the growth in e-commerce and relatively steady business supporting the U.S. military. We acquired our shares at 0.54x Q1 2020 tangible book value and approximately 7x 2019 earnings that were achieved during much more competitive conditions. AAWW ended the quarter at $43.03.”

5. Alaska Air Group, Inc. (NYSE: ALK)

Alaska is in a much better position to stave off the coronavirus turbulence, mainly because of its limited exposure to business travel and solid balance sheet. The company’s cash burn rate is much narrower than its competitors. For example, in September, it burned $117 million, easily beating its own estimates of $150 million.

The company is currently in the news after it agreed to buy several Boeing 737 Max planes. This is the first order of a U.S. career after the Federal Aviation Administration lifted its grounding order following two deadly crashes of Max jetliners.

The stock is down over 24% year to date.

Smart money sentiment indicates that hedge funds became bullish on Alaska in the third quarter, as 34 out of 816 funds owned the airline’s stocks, up from 29 funds in the second quarter. Ric Dillon’s Diamond Hill Capital is the biggest shareholder of Alaska in our database, with 2,132,938 shares of the company, worth over $78.13 million. Confluence Investment Management said the following about the stock in its Q1 letter:

“We also took a partial position in Alaska Air due to its strong franchise value in the airline industry. Alaska is the fifth largest domestic airline and has a reputation for great client service, particularly on the West Coast where it has a near-fanatical following. The company has one of the strongest balance sheets in the industry with only $550 million of net debt versus $4.3 billion of book equity. The COVID-19 outbreak has upended the airline industry and we’ve refrained from taking a full position in Alaska Air. As always, we will continue to monitor the investment and make changes as we deem prudent.”

4. American Airlines Group Inc (NASDAQ: AAL)

American Airlines is the world’s largest airline by scheduled revenue passenger miles. The airline said on Dec. 23 that it is moving ahead with plans to recall it furloughed workers. About 8,000 American Airlines’ flight attendants have already received recall letters, it added. American Airlines’ revenue in the third quarter fell 73% as the company swung to a net loss of $2.4 billion, compared to $425 million profit a year earlier.

Earlier in December, American Airline shares gained value after BlackRock Inc. disclosed that it owns 29,008,081 shares of the company, representing a a 4.8% stake.

American Airlines recently added about 2,300 new flights to the Caribbean and Latin American, citing an anticipated increased demand in 2021. It also increased its number of available seats by over 8% systemwide.

Insider Monkey’s database shows that 37 hedge funds are bullish on the company as of the third quarter, down from 47 in the second quarter of 2020. Here is what McLain Capital said about AAL in June:

“American Airlines (AAL) : With a $6.5bln market cap & adjusting for the current cash burn & incremental net debt, American currently trades at a higher pro-forma enterprise value than it did at the beginning of the year, while revenues are off 80-90%. The two year notes, AAL 5% 6/2022, currently trade 52 cents on the dollar at a yield to maturity of 46%, implying zero equity value for the common stock. At it’s current projected pace of cash burn, the company will expend its current liquidity before year end. American is one of the most popular stocks among retail investors.”

3. United Airlines Holdings Inc (NASDAQ: UAL)

United ranks 3rd on the list of the best airline stocks to buy for 2021 based on long-term factors. In the short term, however, the company is having a bad time. The stock has lost over 50% in value so far this year. The company expects its revenue to drop by a whopping 70% in the fourth quarter, while average daily cash burn rate is expected to come in the range of $24 million -$26 million, excluding $10 million of average debt principal and severance payments per day in the quarter.

United said on Dec. 4 that it adopted a tax benefits preservation plan to preserve and protect its ability to use large net operating loss carry-forwards and other tax assets.

Out of the 816 hedge funds tracked by Insider Monkey, 40 held positions in United as of the end of the third quarter, up from 38 in the quarter earlier. Brad Gerstner’s Altimeter Capital Management is one of these hedge funds, with 4,803,279 shares of the company, worth $166.91 million.

2. Delta Air Lines, Inc. (NYSE: DAL)

As of the end of the third quarter, 43 hedge funds in our database collectively held $753.2 million worth of stakes in Delta, up from 39 hedge funds with a combined stake of $864.78 million in the second quarter. Paul Reeder and Edward Shapiro’s PAR Capital Management is the biggest shareholder in Delta, with 7.64 million shares worth $265.43 million.

Deutsche Bank recently downgraded Delta, among several other airline stocks, to Hold, citing COVID-19 crisis. Earlier in December, Delta asked its employees to take more unpaid leaves as the company tries to offset huge losses amid the travel slump caused by the coronavirus. Here is what Miller Value Partners said about DAL in its Q2 investor letter:

“Delta Air Lines Inc. (DAL) declined -1.38% over the period after the initial hit to the stock in 1Q following the outbreak of the COVID-19 pandemic. The company reported 1Q results with EPS of -$0.51, in-line with consensus. The company guided for June revenue to be down 90% YoY and announced another $1B cut to capital expenditures (CAPEX) for a total cut of $3B so far this year. The company ended the quarter with $6B in liquidity and they expect to end the June quarter with $10B in liquidity. Delta held its annual shareholders’ meeting where it noted that it expects to finish the 2nd quarter with over $15B in liquidity with a daily cash burn of $30M getting to breakeven by the end of the year.”

1. Southwest Airlines Co (NYSE: LUV)

Southwest is the most popular airline stock to buy for 2021, as 51 hedge funds out of 816 tracked by Insider Monkey had positions in the company as of the end of the third quarter. The total value of these investments is $744.92 million. Southwest stock is down over 15% year to date. However, the stock received a bullish outlook earlier in December from Bernstein. The firm said that the availability of coronavirus vaccine indicates the dark times for Southwest could be over soon.

Southwest CEO Gary Kelly recently said that the company will continue adding new cities to its network despite the rough industry situation.


18 MONTHS OR MORE OF UNPRECEDENTED OPPORTUNITY

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 


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