An Airline Only Penny Pinchers Love

03/18/2010 1:00 pm EST

Focus: STOCKS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says Irish discounter Ryanair offers lousy service and rock-bottom fares—and customers and investors love it.

During the past few days, the discussion in the media and among many analysts has shifted from the real world to the market itself. It's started focusing on whether we're on the verge of the next leg up in the market.

The correct question to ask is whether a rally will lift all stocks as did it last year, or will it be more discriminating and let lousy companies with lousy stocks fail. The answer, confirmed by the ChangeWave Alliance Research Network, is that we can expect a strong up market for at least the next 90 days; and, yes, we can still make great short plays on lousy stocks.

I believe the gains in the market will be short-lived. I still believe that the second half of 2010 is going to be very hard on the market—and, thus, good for the shorts in our portfolio.

The bottom line: We need to be prepared to play each leg. The Street now believes the core middle class is emerging from its cave and we will make money agreeing with this false wisdom with shorter-term positions such as my new recommendation, Ryanair.

Ryanair (Nasdaq: RYAAY) is Ireland's highest-profile company, and the European equivalent of Southwest Airlines (NYSE: LUV) and JetBlue (Nasdaq: JBLU). [But Ryanair] just doesn't have any of the frills those airlines offer.

It is the most successful start-up in European history and it's very well managed. Even though it's in the midst of the European version of the Great Recession, Ryanair has managed to boost passenger traffic 6% in February and, unlike other airlines, it has maintained profitability through the good times and bad.

Worth noting:

* Ryanair considered charging for use of rest rooms on its planes—no kidding! And, while it was stopped by regulatory authorities from charging, its passengers were so fiercely loyal that they didn't care one way or the other. (Editor’s note: For a profile of Ryanair and its colorful chief executive officer Michael O’Leary, click here.)

* I once tried to get a refund for a Ryanair unused ticket. You could hear the laughter from the customer service rep all the way across the Atlantic.

* Ryanair drives demand better than any airline, including Southwest or JetBlue. If it has empty seats, the airline e-mails prospective passengers and offers the seats for a pound plus taxes for a one-way ticket. Of course, those passengers have to pay the going rate to get home.

The Dow Jones Transportation Index has broken out, lending support to the sector, so it's a good time to go long a transportation stock.

Buy the Ryanair (RYAAY) June $30.00 Calls (QRX100619C00030000) under 85 cents. (The stock closed above $26 Wednesday, and the options traded for 45 cents—Editor.)

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