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Buy the Entire Airline Industry Rather Than United Airlines Stock Alone

On June 1, InvestorPlace advisor Louis Navellier had a dose of reality for United Airlines (NASDAQ:UAL) shareholders, suggesting that the company and, by extension, UAL stock, had tough times ahead.

“There is no relief for United or other airlines in the near future. Business travel has all but stopped during the pandemic. Those highly profitable business class seats may never fill the way they did before … Vacation travel isn’t expected to return to anything remotely resembling ‘normal’ levels until researchers develop and deploy a vaccine. Even then, the worst recession in generations could hobble consumer spending for years to come,” Navellier wrote. 

The airline is going to do everything it can to cut its cost structure to the bone over the next year. That includes laying off a big chunk of its staff in the fall once it’s no longer obligated to keep employees on the payroll as part of receiving grants and low-interest loans from the federal government as part of the airline bailout. 

I recently took a look at United’s financial situation and the three other major airlines. I concluded that Southwest (NYSE:LUV) had by far the best financial position. That said, I’m still very cautious about airline investments because the risk is much higher than the reward at this point.

So, if you think United’s a buy, here’s why I believe the U.S. Global Jets ETF (NYSEARCA:JETS) is the smarter move at this point.

A Rising Tide Lifts All Boats

Over the past week, the airline industry as a whole generated a total return of 12.9%, 310 basis points less than UAL stock. Score one point for United. However, if you look at the year-to-date total return of the industry, it was down 49.3% through June 1, 17.3 percentage points less than United. Score two points for the industry. If you look at the YTD, one-year, three-year, five-year and 10-year returns, the industry wins every time, except for the 10-year performance, where United outperforms it by seven basis points on an annualized basis. Score the industry an easy winner. 

As I stated in my recent article about the airlines’ respective finances, Southwest might be the only airline with a net cash position, but that doesn’t guarantee it will be the most successful as the economy recovers from the novel coronavirus. We have no idea how this will play out.

This means, if you don’t know how this plays out, you’ve either got to buy the entire industry or buy none of them. It’ll be tough to win the in-between position.

That’s why I suggested in mid-March that if investors had to buy into the airline industry — I thought it was a bad idea — JETS made more sense because of the diversification. 

“I think a smart play over the next year would be to buy the U.S. Global Jets ETF (NYSEARCA:JETS) — as I write this, it crossed hands at $20.45 — and save some dry powder to buy every week it drops more than 2% over the next 6-12 months,” I wrote on March 12. “The biggest reason I’d bet on JETS over LUV or even AAL is that it provides you with diversification through its 33 holdings. The holdings include airline stocks, airport owners and even Boeing (NYSE:BA), which is bound to make a comeback once the 737 MAX is back flying and the coronavirus has been eradicated.”

The Bottom Line on UAL Stock

From March 11 through June 1, JETS is down 22.3%. During the same period, UAL stock is down 40.9% and LUV is down 20.8%, 150 basis points better than the ETF.

But consider the company-specific risk you took by buying LUV, and only LUV. The reward of 150 basis points hardly seems worth the effort. As InvestorPlace’s Muslim Farooque recently stated, it might be better to wait for its revenues to improve before making such a company-specific bet on United Airlines. 

In the meantime, the smarter play would be to buy JETS and hold until the airlines are back in growth mode, whether that’s one year, two years or even longer.

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