Cleared for Take Off

11/08/2013 8:00 am EST

Focus: FUNDS

S&P Capital IQ has positive fundamental outlooks on the airline, air freight, and logistics and commercial aerospace groups, notes S&P Capital IQ equity analyst Jim Corridore in The Outlook.

We think the US airline industry is poised to benefit from increasing air travel demand, both business and leisure, that would come with an improving US economy.

Capacity cuts over the past five years have left the industry with much better pricing power than in past industry cycles, and we think airline executives are managing their businesses for sustainable long-term profitability more than they have in the past.

The industry is also generating cash from operations and has increasingly used that cash to pay down debt, buy back stock, and initiate or increase dividends.

We are also positive on air freight and logistics. We think valuations across the group largely look attractive, and we expect volumes to advance on an improving US and global economy.

We think large-scale shipping companies like FedEx (FDX) and United Parcel Service (UPS) will see operating margin expansion.

Our positive view on commercial aerospace reflects S&P Capital IQ Equity Analyst Eric Hugel's belief that the sector will benefit from improving commercial air traffic, driven by recovering global economic trends.

Mutual fund investors looking to capitalize on trends in these three industries might want to take a look at a fund that encapsulates all three: the Fidelity Select Air Transportation Portfolio (US:FSAIX).

The fund takes as its mission, investing in “companies engaged in the regional, national, and international movement of passengers, mail, and freight via aircraft.”

It has 31 individual holdings, with its top ten accounting for 67% of total assets. The fund gets high marks for having a high percentage of its top ten holdings in stocks currently recommended by S&P Capital IQ analysts, including UPS, Boeing (BA), Delta Air Lines (DAL), FedEx, Precision Castparts (PCP), and Textron (TXT).

The fund also scores highly for having no front-end sales load and low expenses. Turnover is slightly lower than the peer average at 74% versus 81%.

We note that the fund's manager, Mathew Moulis, has been in place only since 2012; in general, we prefer funds with long management tenure.

In the year to date through October 14, the fund was up 36% versus a peer average return of 14.2%, while in 2012, it was up 19% compared with 15% for peers, so the new management team's performance has been good so far.

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