Speculative Flyers ...

11/11/2005 12:00 am EST

Focus:

Few industries have been as out of favor in recent years as the airlines. Nevertheless, many leading advisors are seeing opportunity for "blue skies ahead." Here, Beth Gaston Moon, John Murphy, Elliott Gue, and Mark Leibovit offer commentary on the sector.

(For more on the advisors cited below, please click on their photos.)

Murphy, John"The drop in energy prices during October was giving a big boost to the fuel-sensitive transportation stocks," notes technical analyst John Murphy. "With crude continuing to trade below $60, the Dow Transportation Average has broken through its spring high to reach a new all-time high. Its relative strength ratio, which turned up in late September, is also breaking out. The biggest percentage gains, however, are coming from the airlines.

"Airlines were the market's top group during the month of October. That makes perfect sense. Airlines are the most fuel-sensitive group in the market. They suffer when energy prices rise and prosper when energy falls, as it's been doing since late September. The AMEX Airlines Index closing above its 200-day average for the first time in three months. Its relative strength ratio has been rising since mid- September after oil started to slide. That's the market's way of telling us that falling energy prices are having a positive impact on the market."

Gue, Elliott"When it comes to profitability, the airline industry is pathetic; regional airlines are a totally different story," says Elliott Gue, editor of Advantage Bulletin. "Mesa Air Group (MESA NASDAQ) is a regional airline offering both passenger and air cargo services. More than 90% of its revenues are earned through payments from partner airlines. This is how Mesa and other regionals have been able to stay profitable even as the big carriers bleed red ink. Technically, Mesa formed a massive double-bottom pattern around 5, and recently broke above resistance at 8.25 on heavy volume. A move to 13-to-15 is possible in the next six months.

"Republic Airways (RJET NASDAQ) also gets paid a fixed fee for operating certain routes on behalf of the majors. Republic is very profitable, earning nearly $2 per share on a trailing 12-month basis. RJET just went public in 2004 and has been basing in a broad pattern below 15 since that time. Recently, Republic broke higher and retested its base on good volume. Traders should buy below 17 for a 2 to 4 month holding period. Ultimately, there's upside to the mid-20s."

Leibovit, MarkMark Leibovit, editor of The Volume Reversal Survey, notes, "US Airways Group (LCC NYSE) operates approximately 4,000 flights per day and serves approximately 225 destinations worldwide, including Europe, the Caribbean, Mexico, and Canada. It is essentially a new airline formed from the old bankrupt US Air and the dynamic America West Airlines headquartered in booming Phoenix. New buyers should purchase the stock in the 20-22 range. Our tentative upside target is a move to $26 per share."

Gaston Moon, Beth"AMR Corp. (AMR NYSE), the world's top air carrier, has been mounting a recovery since late September, when it reached a short-term bottom at the psychologically significant 10 level," notes Beth Gaston Moon. "Since narrowly dodging a dip into single-digit territory, AMR shares have rallied up 35%. This move has taken the stock above its ten-week and 20-week moving averages, the latter of which is now turning higher. The 14 level had acted as resistance for the shares in May and August and a solid break through this region could catapult the shares to territory not explored since early 2002.

"Not surprisingly, AMR has failed to attract much positive attention, given the stigma of its sector. The equity's put/call open interest ratio suggests an extreme in pessimism among the speculative crowd. What's more, short interest constitutes 27% of the equity's available float. At the stock's current average daily volume, it would take these short sellers nearly eight days to eradicate all of their bearish bets, which is a formidable layer of short-covering support. These factors, combined with technical trends, have garnered the security a strong Schaeffer's Equity Scorecard rating of 8 on a scale from zero to 10."

Headley, Price"In the past few years, the airlines have been in the business of turning $1 billion into negative $3 billion," says technical expert Price Headley. "However, here at BigTrends, we are focused on opportunity, not past problems. Indeed, there have been some interesting developments recently with airlines. We knew months ago that what the industry needed was a good old fashioned bankruptcy. That would give the airlines more pricing power and the ability to finally increase fares. Delta and Northwest answered that call recently. On top of that, heating oil futures, which best represent the price of jet fuel, reversed sharply from prices above $2.

"The Amex Airline Index (XAL) is currently just above $48. The index is nearing a major area of resistance at the $50 level. We will ultimately be very bullish if the index crosses over 52, but a move over the 200-day average will be a good start. To determine the overall health of the sector, there are two airlines that we are watching closely: Southwest Airlines (LUV NYSE) and Continental Airlines (CAL NYSE). Traders should turn bullish if the AMEX Airline index closes above the 200-day line and become even more bullish if the index crosses the 53 mark."

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