Psst, want to buy a used airline?

03/12/2010 3:43 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Why I will never be a momentum investor. Or a trader.

I just can’t bring myself to say “Fundamentals don’t count if the price trend is good enough.”

Continental Airlines (CAL) has come up two of my screens in the last few days as a buy on its price momentum. It came up earlier in mid-September—on September 21 to be precise—when the stock crossed above its 50-day moving average.

It traded at $16.81 that day. It’s at $23.10 as I write this around 3 p.m. ET on March 12. That’s a gain of 37%.

But I just couldn’t buy the shares. Nothing against Continental but the economics of the airlines industry are just so horrible that a couldn’t get them out of my mind long enough to buy this stock.

Oh, well. As the scorpion said to the frog as they both sank to the bottom of the river, “It’s my nature.”

I love this little summary of the industry from the Financial Times this morning: Since 2001 the world’s airlines have flow 18 billion passengers, collected revenue of $3.75 trillion, and produced a net loss of $14 billion.

There’s a reason why so many airlines practice serial bankruptcy—it’s a way to shed costs so that, for a while, the airline can be a low cost-provider of air travel.

For a while. And then costs start to creep higher until one day you wake up and, compared to more recently bankrupt airlines, you’re the high-cost provider.

Continental’s two bankruptcies were just too long ago—1983 and 1990. Morningstar estimates that adjusted for length of flight Continental’s labor costs are now 26% above the industry average. The company even has a defined benefit pension plan. In these days! Shocking!

When a stock is coming off a bottom—a time when everybody is convinced the world is coming to an end—the fundamentals don’t have to look very good. All they have to do is be better. For example, Continental’s management told investors in its most recent earnings conference call that revenue from high-yield passengers (the folks that pay full freight or buy first-class and business-class tickets) fell 1% in December. Not a great performance—until you compare it to the 40% drop in revenue from this class of passenger in May 2009.

Watch stocks in general—and not just Continental—to see if fundamentals begin to count more as the easy-to-win comparisons with truly terrible quarters in late 2008 and early 2009 start to come to an end later in 2010.

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