Trading Airline Stocks in an Energy Bull Market
How about a trading idea to start the day? This is a family publication, so we don't normally discuss trading ideas. But the rebound in Babcock and Brown shares yesterday got us thinking: when do you know the selling in a share is overdone?
Shares of Babcock and Brown Limited (ASX:BNB) were up 13% yesterday. Shares of Babcock and Brown Power (ASX:BBP) were up nearly 16%. The Power group announced it had secured $2.7 billion in financing and arranged to sell $360 million in assets.
It's never good when you have to sell the furniture to pay the electric bills. But then, BBP was down 46% last week when it looked like tight credit markets might prevent it from raising money in the debt market at all. The model-using debt to fund asset purchases-still faces some big challenges. We think it still sucks, generally speaking.
As a trader though, noticing all the bad news with BNB and BBP might have been your cue for a quick-turn around trade. It's not the sort of thing you'd risk retirement money on. But with so much bad news in the market, we expect to see more of these turn-around trades. They key is figuring out when it can't get any worse in a stock. That's tricky.
"Hey Gabriel," we asked our former currency trading Frenchman, "would you buy Qantas (ASX: QAN) stock today?"
"May I have a look at the chart first?"
"But of course."
"Not until $2.90. Perhaps there."
Please don't take that as investment advice, dear reader. We asked him the question because the airline stocks have taken an absolute beating with the high oil price. It is now safe to be a perma-bear on the airlines. To us, this is just when a trade starts to get interesting-when everyone else is on the other side.
The trouble with being an airline these days is that it's a really bad business. You have high capital costs, high energy costs, long-term contracts with unions, and lots of competition. Many airlines will go out of business the longer the oil price stays high. At least there will be less competition.
You don't reckon Qantas will go out of business. It's the national airline. If push came to shove, you can see the Rudd government putting up a few spare billion in mining royalty payments to keep the planes running on time.
But the business conditions for airline stocks probably won't fundamentally improve any time soon (or at all, if you subscribe to the Peak Oil Theory). But the sentiment against the airlines might improve. Can you name any airline bulls? We can't either. That might be a good sign for traders.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia and pens the small cap newsletter, The Australian Small Cap Investigator. He is also a contributing editor to the Australian resource investing publication Diggers & Drillers.
Comment by dyork on 19 June 2008:
The airline model is fatally flawed, always has been. Industry profits are never enough to cover capex, for the reasons you give and because the capex is too long term to account for correctly.
Survival requires an occasional bankruptcy to wipe out liabilities (eg United) or a bankrupt competitor to give breathing room (eg Ansett).
Qantas will survive only at the expense of competitor(s). Virgin is the obvious first candidate to go.
Comment by rick on 20 June 2008:
Hello I think any BASIC trade of COMMON stock should be a short term trade make your 20% to 50% get out.
With charts and history is good but how do you factor loss of oil!
There were oil strikes but never depletion.
The safety net is gone.
We need a new formula to add to charting the x factor, until we reduce or replace oil as our staple.
2010 carbon credits (who pay for it the end user) it will take until 2012 until stability or out come returns
Rick E