Fly South with LATAM

04/10/2017 2:50 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

When we see an unfamiliar stock that changes its character, turning from a long-term loser into a medium-term winner, we get intrigued. And that’s certainly the case with LATAM Airlines Group (LFL), explains global expert Paul Goodwin, editor of Cabot Emerging Markets Investor.

LATAM (previously called LAN Airlines) is a Chilean airline with a history that stretches back to 1929 when it was founded as the national airline of Chile.

LATAM now boasts a fleet of 355 Airbus and Boeing aircraft that provide passenger service to 138 destinations in 25 countries and freight services to a slightly larger area.

After topping $30 in late 2010, LFL rolled over gradually, then went into an accelerating correction that dropped it to $4.4 in January 2016.

The stock rebounded well from that low with the support of the broad market. It has fought its way to above $12 in recent trading; much of the power of this advance has come from a big gap up in July and another after the company’s excellent earnings report on March 15.

The change in the character of LATAM became obvious in that Q4 earnings report that reversed nine quarters of declining revenues. LATAM reported earnings of 10 cents per share, largely as a result of a cost-reduction program that reduced passenger capacity on both domestic and Brazilian routes.

The company’s reduction in fleet commitments has already shaved over $1 billion off costs, and further reductions in 2018 will bring that total to $2.2 billion.

One of the hopeful aspects of LFL is that the stock’s price is now approaching the lower limit that many institutional investors use as a cutoff. If the stock continues to rise, especially if it can get near $14, it will qualify for the investment guidelines of an increasing number of mutual funds.

With a market cap of around $6.7 billion and annual sales of $9.5 billion, LFL should attract more attention as it rises. There are now 117 whales on board who own 11 million of the stock’s 278 million float.

Another intriguing possibility, although it’s a two-edged sword, is that short interest in LFL is a whopping 4.8 million shares, or 12.7 days of trading volume. If the stock can continue its rise, there’s the possibility of a short-covering rally that could give a big boost to the stock.

With the Cabot Emerging Markets Timer positive but some weakness in the broad market, we’re inclined to approach LFL cautiously. We’ll take a half position until we get a little profit cushion to provide some protection.

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