Is Alaska Air Set to Soar?

01/20/2016 9:50 am EST

Focus: STOCKS

Michael Berger, of Technical420.com, shares four reasons why he's favorable on this airline stock and thinks the recent pullback has made shares a very attractive investment from a total return perspective.

Since the beginning of 2015, continued deterioration in the energy sector has caused more than 40 North American oil companies to file for bankruptcy. Given the duration of the weakness in oil prices, bank stocks with energy exposure have remained in focus as credit risk concerns increase. On the flipside, several industries are poised to benefit from weak oil and gas prices.

The oil price environment will likely get worse before it gets better as the global oil oversupply situation worsened after economic sanctions were lifted off of Iran over the weekend. On Monday, Iran's deputy oil minister said the country will increase oil production by 500,000 barrels a day.

One of the industries that has benefited from the weak oil price environment is the airline industry. According to the International Air Transport Association, reductions in the cost of jet fuel saved the world's airlines $89 billion during 2015. This is a trend that we expect to continue during 2016.

Favorite Airline Stock

Currently, our favorite airline stock is Alaska Air Group, Inc. (ALK). During 2015, ALK was one of the top performing airline stocks and shares rallied more than 35% during the year. During the last six weeks, ALK has traded very weak and shares have fallen more than 23% from its high on December 7, 2015. ALK is trading below its 20-,50-, and 200-day moving average and shares are trading in oversold territory.

We are favorable on ALK due to its exposure to the United States airline industry, expanding cost advantages over its competitors, upside from the introduction of a premium seating class, and increased potential for further cash returns to shareholders. ALK already offers a 1.1% dividend and we expect to see this grow as the company continues to benefit from lower jet fuel costs.

Alaska Energy Concerns Are Overdone

We expect to see ALK trade lower as the global market continues to sell-off. In the near term, the competitive capacity growth against ALK is very high. This poses a risk to the company and may be a headwind for ALK when they announce earnings Thursday.

Over the last two years, ALK has done a great job managing this risk, though, and we do not expect it to severely impact earnings.

Outlook Is Bright

Although ALK benefits from lower oil prices, concerns around the energy market in Alaska have hampered the stock's recent performance. The energy industry in Alaska accounts for only 2% of its revenue so we think these concerns are overdone.

The recent pullback in ALK has made shares a very attractive investment from a total return perspective. The potential for share price appreciation coupled with a growing dividend creates a great opportunity for investors and traders.

Michael Berger, Founder and President, Technical420.com

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