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Stock Pick - JBLU

(September 9, 2004)

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JetBlue Airways Corp. (JBLU)
Peter Lynch, in his books “One Up on Wall Street” and “Beating the Street” has always emphasized his readers to not “chase the hot stocks” and that sometimes, the best stock to buy is the strongest stock in the weakest industry.  And nowhere is this truer than in the airline industry.

While the number of people flying and the domestic miles traveled had been steadily increasing over the last two years, the industry is still continuing a shakeup which dates back to the days before the events of September 11th.  Over the last few years, revenues for the main airlines have declined, while revenues for the regional and the low-cost airlines have steadily increased.  The low cost airlines now make up 25% of the domestic market, and they are still projected to grow at a double-digit pace over the next decade.  Moreover, it now looks like that the bankruptcy of US Airways is imminent, while the bankruptcy of Delta Airlines is also a distinct possibility.  Whether these two airlines will file bankruptcy remains up in the air – but one thing is for sure – the general cutback of employees and flights by both these airlines will help low-cost airlines like JetBlue if they are serious about grabbing market share while the major airlines are bleeding.

This author believes that the general shakeup of the airline industry should be beneficial for low-cost airlines going forward – it is also not clear to this author whether major airlines will be able to compete with the low-cost airlines in the domestic market, as exemplified by US Airways, which is now predicted to file bankruptcy for the second time in as many years.

This author likes JetBlue because it has the lowest cost structure of all the domestic airlines, as shown by the following chart that from the Wall Street Journal:

Seat Numbers - Cost, in cents, to fly one seat one mile at U.S. airlines in the second quarter of 2004.

In addition – in spite of recent events surrounding the two hurricanes in Florida (which are really one-time events) and ever-rising fuel costs, JetBlue has remained “solidly profitable” while rival low-cost airliner AirTran is projected to lose money in the latest quarter.  The technicals for JetBlue also looks good, as can be seen in the following daily chart:

JetBlue Airways Corp.(JBLU) - The stock gapped down yesterday on the earnings warning but it ultimately ended up closing positive.  It also successfully tested the recent double bottom at approx. $22 per share.  The author's take: The news yesterday already represents the worst scenario.  If today's news couldn't take the stock down further, what will?

As I have said above, I believe yesterday’s warning represents the final shakeout in JBLU longs.  In addition, there is currently a short interest of over 16% of the total float – which represents the biggest short interest percentage since the company went public.  This is ample fuel for a potential sustainable uptrend in the stock.

Again, I believe that we are still in a cyclical bull market – I also believe that crude oil prices (which represents approximately 25% of an airline’s cost structure) will continue to decline in the months ahead (as outlined in my past commentaries) – which will further help JetBlue in reducing its costs (since it is “only” 40% hedged -- although this decline may come too late for airlines such as US Airways and Delta).

Finally, readers who are interested in gaining more knowledge and the historical background of JetBlue may want to read the following article from the Motley Fool. 

Happy Trading/Investing!

Henry To, CFA

P.S. Please discuss this stock in our individual stocks discussion forum.

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