AIRLINE SURVIVAL EQUALS DILUTION

Earlier posts have detailed my adventure in owning airline stock. I knew airlines were probably the worst industry to invest in, but Southwest, the best of the worst, was offered at a very attractive price. Rather than thinking, I bought and immediately started losing money. It took about six months of regret before the price returned to my basis. About 90 days after my exit, airline shares started moving upward. Have they ever. The airline ETF, FAA, is up over 100 percent in the last six months!

Does a 100% move mean the industry must be attractive? No, it means that the industry won't go bankrupt in the near term. New equity offerings and sale/leasebacks have raised cash for struggling carriers. Cheesey fees for bags, seat selection, and pets have juiced occupied seat revenue. But it is still a lousy industry. It requires too much capital, has unionized workforces, is subject to large fuel swings, and, mostly, faces pricing pressure from both leisure and business travelers. As usual, the optimists have gotten ahead of themselves and run prices up too fast.

I hope that I've got it right this time. Recently I borrowed some AMR shares and sold them short. American has enough money to continue to bleed for the next year and won't go toes up anytime soon. But it still must service a huge amount of debt, about 10Billion, with terrible operating margins. A difficult task. AMR recently sold equity and diluted the common shareholder, and issued debt at 10.5% for 3 years! They are staying alive, but at an expensive cost.

I think airline shares will go down; I know they won't go up another 100 percent. AMR is about as weak as they get. This time I picked the lousiest company in the lousiest industry and time is on my side.

Enjoy Summer Because The Fall Is Coming

And I do mean the fall. Falling stock prices this Fall. The market, no matter how good it feels, is way ahead of reality. I know Warren Buffett says that markets rebound before economies do, but this economy has a long way to recover before it is healed. We have made only a small dent in deleveraging the years of debt exuberance.

This Summer I've lopped a couple of strokes off my golf handicap, worked down the honey-do list, grilled and floated in the pool with the dog. My remaining stock portfolio has done wonderful and I don't regret any opportunity cost associated with my outsized cash position. Grilling, beer, and a growing portfolio-perfecto!

It took a while but I finally got out of a stupid investment, Southwest Airlines. When I bought it I opined that it was a lousy industry and even Buffett had trouble making money in it. But I thought LUV was the best and the price was attractive. Well I've been in a deep loss for months and the market euphoria has finally pushed it up enough that I've exited with a decent gain. But, the industry stinks and I've learned a lesson. Never buy a great company in a bad industry.

Flowers reports soon and I think all the insider buying bodes well for the results and hopefully it isn't already baked into the price. Aarons and K12 have rebounded nicely and should continue to move upward as their sell-offs were overdone. My remaining stocks like the above names and Waste Management are all defensive and should do relatively well when the market moves South as I expect it to this Fall.

Why do I expect it to decline? Here's why:

Commodity prices don't signal growth, they signal speculation

China's growth will be modest and their commodity binge is troubling

The chicken and the egg question and I think the American consumer will not be enticed by cheap Chinese goods. Saving yes, buying no.

Financials are not healed and will need another round of capital raising, if they can get it.

Obama is finally starting to scare both business and consumers

I could be wrong, but as Charles Barkley says: "I don't think so". It remains better to protect capital than to miss gains.

LAST WEEK I WAS A SUPER BOWL STAR. THE PRIOR WEEK I WAS THE GROUNDHOG AND ENGULFED IN MY SHADOW

My missives from this past week were worthy of wearing a Steelers uniform. Flowers Foods was up $.50 today for a nice percentage gain. My Vulcan puts and shorts gained value as that stock continued its slide. Best of all, I followed my own advise and did not short any of the for profit education companies such as ESI. ESI charged upward today as it always does when the market in general is having a down day as investors seek the perceived safety of this sector. Finally PSD edged closer to it's February 6th merger closing date and its price rose a few pennies.

The prior week I thought the pounding of the nation's best airline was overdone and opined that it was a buying opportunity. Southwest [LUV] stutter stepped for a few days and has gone down ever since. That brilliant decision, so far, was worthy of  Punxsutawney Phil  being engulfed in his shadow. It's a gloomy feeling. 

Todays results were approximately a push financially since I put more money into LUV. I'm hoping that the Steeler in me makes a continued comeback tommorrow and I can lift that cloud as making money sure feels good.

Southwest Airlines: The Best For Less

I've never owned an airline stock; always thought it was a poor industry. Warren Buffett waded into U.S. Air a decade or so ago and reminded himself that, even if cheap, a poor company in a lousy industry isn't necessarily a good investment.

But I've always tried to fly Southwest when possible, both because of fare pricing and service, and found LUV to be an excellent experience. I've flown all the others and rarely find myself pleased. Even if ticket pricing is good, service isn't. The experience is clumsy and often irritating. So I've always watched Southwest's equity since it was the best operator in a tough industry. 

Several days ago the company reported their latest results and beat analysts expectations handily, pre-one time items. They walked investors through the capping of their fuel hedge program, reported on curtailing underperforming routes, and using the freed up aircraft on newly opening slots in Minneapolis and LaGuardia. All of their load factors and yields were good. And they hadn't forgotten about their customer experience as they remained adamant about not charging for baggage and other customer irritants.

The market heard Southwest's message and the share price went up several dollars. I was on the cusp of breaking my internal rule of investing in a bad industry and I was rescued by a rally in the stock. My potential book value purchase of the country's leading airline was derailed.

Today the market doesn't like Southwest and has pounded it down to the pre announcement  price range. You can buy the nations pre-imminent airline for .8XBook and at about 4.5 X Cashflow. You get sound management, an up-to-date fleet, happy customers, a reasonable cost structure, and a lid on the impact of rapid decreases and increases in fuel. 

As this piece is being written LUV is $7.90 and I've pushed the "buy" button. The industry will suffer during this  economic slowdown, but LUV has the balance sheet, operating margins, and management to do well at the expense of their competition.

I'm hopeful  that I don't learn the same lesson that Buffett must have as he no longer has any positions in the airline industry.