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Airlines stocks have been flying high in recent sessions, breezing past the broader market fund SPDR S&P 500 ETF (SPY - Free Report) . The airline companies belong to a bottom-ranked Zacks industry (bottom 6%). Still, stocks are soaring. Let’s find out the reason:
Buffett Bets Big on Airlines
Buffett’s Berkshire Hathaway Inc. broadened its stake in the airline industry and boosted its investments in Delta Air Lines Inc. (DAL - Free Report) and Southwest Airlines Co. LUV) in the second quarter. The stake in Delta went up by 19% to 63.7 million shares while Southwest sees a rise in stake from 47.7 million to 56.5 million.
However, Berkshire Hathaway cut its stake marginally in United Continental and American Airlines (AAL - Free Report) , per Bloomberg. The trimming of exposure was to avert crossing 10% ownership in each of those companies, which is “Buffett’s personal threshold that he didn’t want to cross.”
Investors should note that most of airline stocks have a top-notch Zacks Value Score of A. And Buffett being a fan of value stocks, understandably dipped his toe in the sector.
Capacity Cuts
Per an article published on the Wall Street Journal, there is a decline in capacity projections in airline shares, with the airline group seeing a 9.9% rise in share price since late June. For example, American Airlines trimmed its capacity guidance for the third and fourth quarters.
And for 2018, United Continental’s capacity is estimated to expand in the 4.5-5% range compared with 4.5-5.5% projected earlier. Delta Air Lines’ July load factor rose year over year, as traffic demand surpassed seat supply.
Earlier, investors were concerned about big expansion plans as airliners flying with too many vacant seats are likely to cause lower ticket prices and lesser profitability. But the trimming of the full-year capacity growth forecast turned out a positive.
Decent Earnings
Delta’s second-quarter earnings and revenues beat estimates. The bottom line expanded on a year-over-year basis despite high fuel costs. The top line increased more than 9% from the year-ago figure. Strong demand for air travel boosted revenues. United Continental HoldingsInc.’s (UAL - Free Report) earnings and revenues surpassed the Zacks Consensus Estimate of $3.07. The bottom and top line also increased significantly year over year.
Four other airlines — American Airlines, Southwest Airlines, JetBlue (JBLU - Free Report) and Alaska Air Group (ALK - Free Report) — surpassed earnings estimates but lagged the Zacks Consensus Estimate on revenues. Overall, the earnings picture of the sector remains decent, if not great (read: Airlines ETF Gains in 1-Month Period Despite Mixed Results).
ETF in Focus
Since fundamentals are turning positive, investors having a strong stomach for oil-related risks may take a basket approach. This approach makes up for company-specific concentration risks as one company’s weakness compensates for another company’s strength (read: Winning and Losing Sectors ETFs Post OPEC Decision).
JETS in Focus
The $101.6 million-fund holds more than 30 stocks in its portfolio and is concentrated on a few individual securities. United Continental (13.14%), Southwest Airlines (12.97%), Delta Airlines (12.26%) and American Airlines (11.22%) take the first four positions in the fund. Alaska Air and JetBlue hold the seventh and eighth positions in the fund with a 3.95% and 3.73% weight, respectively. The product charges 60 bps in fees. The fund added about 4.3% in the past five days (as of Aug 21, 2018) (see all industrials ETFs).
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What's Behind the Recent Rally in Airlines ETF?
Airlines stocks have been flying high in recent sessions, breezing past the broader market fund SPDR S&P 500 ETF (SPY - Free Report) . The airline companies belong to a bottom-ranked Zacks industry (bottom 6%). Still, stocks are soaring. Let’s find out the reason:
Buffett Bets Big on Airlines
Buffett’s Berkshire Hathaway Inc. broadened its stake in the airline industry and boosted its investments in Delta Air Lines Inc. (DAL - Free Report) and Southwest Airlines Co. LUV) in the second quarter. The stake in Delta went up by 19% to 63.7 million shares while Southwest sees a rise in stake from 47.7 million to 56.5 million.
However, Berkshire Hathaway cut its stake marginally in United Continental and American Airlines (AAL - Free Report) , per Bloomberg. The trimming of exposure was to avert crossing 10% ownership in each of those companies, which is “Buffett’s personal threshold that he didn’t want to cross.”
Investors should note that most of airline stocks have a top-notch Zacks Value Score of A. And Buffett being a fan of value stocks, understandably dipped his toe in the sector.
Capacity Cuts
Per an article published on the Wall Street Journal, there is a decline in capacity projections in airline shares, with the airline group seeing a 9.9% rise in share price since late June. For example, American Airlines trimmed its capacity guidance for the third and fourth quarters.
And for 2018, United Continental’s capacity is estimated to expand in the 4.5-5% range compared with 4.5-5.5% projected earlier. Delta Air Lines’ July load factor rose year over year, as traffic demand surpassed seat supply.
Earlier, investors were concerned about big expansion plans as airliners flying with too many vacant seats are likely to cause lower ticket prices and lesser profitability. But the trimming of the full-year capacity growth forecast turned out a positive.
Decent Earnings
Delta’s second-quarter earnings and revenues beat estimates. The bottom line expanded on a year-over-year basis despite high fuel costs. The top line increased more than 9% from the year-ago figure. Strong demand for air travel boosted revenues. United Continental Holdings Inc.’s (UAL - Free Report) earnings and revenues surpassed the Zacks Consensus Estimate of $3.07. The bottom and top line also increased significantly year over year.
Four other airlines — American Airlines, Southwest Airlines, JetBlue (JBLU - Free Report) and Alaska Air Group (ALK - Free Report) — surpassed earnings estimates but lagged the Zacks Consensus Estimate on revenues. Overall, the earnings picture of the sector remains decent, if not great (read: Airlines ETF Gains in 1-Month Period Despite Mixed Results).
ETF in Focus
Since fundamentals are turning positive, investors having a strong stomach for oil-related risks may take a basket approach. This approach makes up for company-specific concentration risks as one company’s weakness compensates for another company’s strength (read: Winning and Losing Sectors ETFs Post OPEC Decision).
JETS in Focus
The $101.6 million-fund holds more than 30 stocks in its portfolio and is concentrated on a few individual securities. United Continental (13.14%), Southwest Airlines (12.97%), Delta Airlines (12.26%) and American Airlines (11.22%) take the first four positions in the fund. Alaska Air and JetBlue hold the seventh and eighth positions in the fund with a 3.95% and 3.73% weight, respectively. The product charges 60 bps in fees. The fund added about 4.3% in the past five days (as of Aug 21, 2018) (see all industrials ETFs).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>