The bill has seemingly come due for the Federal Reserve’s mistaken belief inflation was “transitory.” A late start in tightening policy to combat inflation led to the fastest rate hikes in forty years, and it should come as no huge surprise the stress from such a move might break something. But stocks like Air Lease Corp. (AL) still look attractive, notes Doug Gerlach, editor of Investor Advisory Service.

The collapse of Silicon Valley Bank (“SVB”), the 16th largest bank in the U.S., was the headline casualty. But Signature Bank was also shut down by regulators and the impact was evident across the sector, notably regional banks where share prices declined sharply.

The banking turmoil has substantially changed expectations for the Federal Reserve’s path forward. Fed policy works with long and variable lags. The SVB situation demonstrates the rapid rate increases are starting to bite.

The Fed may be facing a situation where inflation remains a problem but if it continues to raise rates, it also increases the risks to financial stability. That is not where the Fed wanted to end up, and it may be able to thread a needle, but increasingly it appears the Fed may have some difficult choices ahead.

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As for AL, it had a mixed quarter, but the outlook continues to brighten dramatically. Revenue increased less than 1%. EPS fell 20% excluding a gain on the recovery of one of the 21 seized planes. Looking at trends over the past few years, results in Q4 2021 are the outlier.

Results in the year-ago quarter were aided by the receipt of deferred rental payments and an elevated level of “end of lease revenue,” both highly profitable. Subsequent quarters have been negatively impacted by the absence of revenue from planes confiscated by Russia.

Looking ahead, Air Lease expects to take delivery of 70-80 planes this year, a significant increase from 2022. The actual number of scheduled deliveries is 88, but Airbus and Boeing are running three months behind schedule. Air Lease is also looking to sell more planes from its fleet than in recent years, capturing gains on sales while also helping to offset the capital outlay on new planes.

Demand for aircraft is robust, and orders placed with manufacturers won’t be delivered until 2028; airlines needing planes sooner will have to negotiate with holders of an earlier delivery slot, and Air Lease has 398 scheduled for delivery from 2023-2028.

Recommended Action: Buy AL up to $51.

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