Warren Buffett loves cheap airline stocks, which could get a boost from Trump

Airlines already have low valuations, so if tax rates fall, they could be even more attractive


President Donald Trump’s corporate tax plan could increase the profitability of airlines, which would enrich Warren Buffett and other airline investors.

The decision by Warren Buffett’s Berkshire Hathaway to load up on Apple shares is making big news. But the billionaire investor also put money in four airline stocks.

A tailwind for airlines is that their high income tax rates might fall dramatically if President Donald Trump succeeds in cutting corporate tax rates.

In the fourth quarter, Berkshire Hathaway Inc. BRK.B, -0.05%  built a new stake of 43.2 million shares in Southwest Airlines Co. LUV, +3.58% while also adding to its holdings of American Airlines Group Inc. AAL, +2.08% Delta Air Lines Inc.DAL, +2.63%  and United Continental Holdings Inc. UAL, +2.73% Most airlines are expected by analysts to post declining profits in 2017 as fuel prices rise. Industry profits are expected to be healthy in 2018, with those four airlines expected to generate double-digit increases in earnings per share.

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Tax rates

FactSet estimates that the average effective income tax rate over the past 12 reported months for S&P 500 SPX, +0.50%   member companies was 26.4%. The highest U.S. corporate tax rate is 35%, and, of course, many companies pay state and local income taxes as well. It is reasonable to argue that a reduction in the federal corporate tax rate will help some companies more than others, and airlines might be among the biggest beneficiaries.

 

A Harvard Business professor explains Donald Trump

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Harvard Business School Professor Clayton Christensen developed the famous "jobs to be done" theory to explain consumer behavior. He talked to MarketWatch about how his jobs-to-be-done theory can also explain Donald Trump's rise to power.

We decided to broaden our review by looking at the nine airlines included in the S&P 1500 Composite Index, which is made up of the S&P 500, the S&P 400 Mid-Cap Index MID, +0.29%  and the S&P Small-Cap 600 Index SML, +0.55%

Here they are, in alphabetical order, with their effective income tax rates:

Airline	Ticker	Effective income tax rate - 2016*
Alaska Air Group Inc.	ALK, +0.69%	39.48%
Allegiant Travel Co.	ALGT, +0.00%	36.53%
American Airlines Group Inc.	AAL, +2.08%	37.75%
Delta Air Lines Inc.	DAL, +2.63%	34.10%
Hawaiian Holdings Inc.	HA, +0.10%	37.95%
JetBlue Airways Corp.	JBLU, +0.45%	37.58%
SkyWest Inc.	SKYW, +3.57%	39.37%
Southwest Airlines Co.	LUV, +3.58%	36.74%
United Continental Holdings Inc.	UAL, +2.73%	40.74%
Source: FactSet

(For SkyWest Inc. SKYW, +3.57% we are showing the effective income tax rate for 2015, because the company posted an operating loss for 2016.)

Trump has pledged to lower the corporate tax rate to 15%. He said Feb. 9 that his administration would be “announcing something I would say over the next two or three weeks” on corporate taxes that “will be phenomenal” for businesses.

Valuation

The S&P 1500 trades for 16.2 times consensus 2018 earnings estimates, according to FactSet, while the industrial sector of the index (which includes the airlines) trades for 16.8 times consensus 2018 estimates. Here’s how the airlines stack up, by this measure, and how much analysts expect their earnings to grow in 2018:

Airline	Ticker	Consensus EPS estimate - 2017	Consensus EPS estimate - 2018	Expected EPS growth - 2018	Closing price - Feb. 14	Price/ consensus 2018 EPS estimate
Alaska Air Group Inc.	ALK,+0.69%	$7.89	$8.61	9%	$96.30	11.2
Allegiant Travel Co.	ALGT,+0.00%	$10.96	$12.49	14%	$174.85	14.0
American Airlines Group Inc.	AAL,+2.08%	$4.61	$5.35	16%	$46.57	8.7
Delta Air Lines Inc.	DAL,+2.63%	$5.23	$5.79	11%	$49.86	8.6
Hawaiian Holdings Inc.	HA,+0.10%	$4.83	$5.02	4%	$51.10	10.2
JetBlue Airways Corp.	JBLU,+0.45%	$1.82	$2.01	10%	$19.66	9.8
SkyWest Inc.	SKYW,+3.57%	$3.09	$3.47	12%	$35.05	10.1
Southwest Airlines Co.	LUV,+3.58%	$3.89	$4.68	20%	$55.31	11.8
United Continental Holdings Inc.	UAL,+2.73%	$6.77	$8.11	20%	$73.74	9.1
Source: FactSet

It appears from these low forward price-to-earnings ratios that many investors still don’t trust airlines, but the industry has been stable in recent years, as it has found new ways to make money and avoid cutthroat price competition, following decades of mergers, bankruptcies and other disruptions.

Erick Ormsby, the founder of Alcosta Capital Management, particularly favors Southwest Airlines because of the prospect that its high tax rate will fall, as well as 20% expected EPS increase in 2018 and its overall growth trajectory.

“You have a stable environment, relatively speaking, for an airline that is trading at 12 times earnings,” he said in an interview Feb. 14.

By Philip Van Doorn

Source: http://www.marketwatch.com/story/warren-buffett-loves-cheap-airline-stocks-which-could-get-a-boost-from-trump-2017-02-15

5 Stocks Insiders Love Right Now

Insiders at these companies have been scooping up shares of their own stock lately.

Corporate insiders sell their own companies' stock for a number of reasons.

They might need the cash for a big personal purchase such as a new house or yacht, or they might need the cash to fund a charity. Sometimes they sell as part of a planned selling program that they have put in place for diversification purposes, which allows them to sell stock in stages instead of selling all at one price.

Other times they sell because they think their stock is overvalued and the risk/reward is no longer attractive. Some even dump their own stock because they have inside knowledge that a competitor is eating their lunch and stealing market share.

But insiders usually buy their own shares for one reason: They think the stock is a bargain and has tremendous upside.

The key word in that last statement is "think." Just because a corporate insider thinks his or her stock is going to trade higher, that doesn't mean it will play out that way. Insiders can have all the conviction in the world that their stock is a buy, but if the market doesn't agree with them, the stock could end up going nowhere. Also, I say "usually" because sometimes insiders are loaned money by the company to buy their own stock. Those loans are often sweetheart deals and shouldn't be viewed as organic insider buying.

Stocks with notable insider activity is something that I tweet about on a regular basis. These are also the exact type of stocks that I love to trade and alert in real-time.

At the end of the day, it's institutional money managers running big mutual funds and hedge funds that drive stock prices, not insiders. That said, many of these savvy stock operators will follow insider buying activity when they agree with the insider that the stock is undervalued and has upside potential. This is why it's so important to always be monitoring insider activity but twice as important to make sure the trend of the stock coincides with the insider buying.

Recently, a number of companies' corporate insiders have bought large amounts of stock. These insiders are finding some value in the market, which warrants a closer look at these stocks.

Wintrust Financial

One financial player that insiders are loading up on here is Wintrust Financial  (WTFC) , which provides banking and other financial products and services to customers in the Chicago metropolitan area and in southern Wisconsin. Insiders are buying this stock into big strength, since shares have soared higher by 33.5% over the last six months.

Wintrust Financial has a market cap of $2.7 billion and an enterprise value of $3 billion. This stock trades at a fair valuation, with a trailing price-to-earnings of 17 and a forward price-to-earnings of 14.2. Its estimated growth rate for this year is 21.5%, and for next year it's pegged at 6.2%. This is not a cash-rich company, since the total cash position on its balance sheet is $968.46 million and its total debt is $1.23 billion.

A director just bought 9,500 shares, or about $504,000 worth of stock at $53.11 per share. From a technical perspective, Wintrust Financial is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last month and change, with shares moving higher off its low of $46.62 a share to its recent high of $54 a share. During that uptrend, shares of Wintrust Financial have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed this stock within range of triggering a big breakout trade above some key near-term overhead resistance levels.

If you're bullish on Wintrust Financial, then I would look for long-biased trades as long as this stock is trending above its 50-day moving average of $51.63 a share and then once it breaks out above some near-term overhead resistance levels at $54 to $54.09 a share and then above its 52-week high of $55 a share with high volume. Look for a sustained move or close above those levels with volume that registers near or above its three-month average volume of 362,897 shares. If that breakout fires off soon, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $60 to $65 a share.

READ MORE: Trade These 5 Biotech Breakouts Now for Big Gains

Delta Air Lines

Another stock that insiders are active in here is Delta Air Lines  (DAL) , which provides scheduled air transportation for passengers and cargo in the U.S. and internationally. Insiders are buying this stock into notable weakness, since shares have fallen by 13.6% over the last six months.

Delta Air Lines has a market cap of $28.8 billion and an enterprise value of $34.4 billion. This stock trades at a cheap valuation, with a trailing price-to-earnings of 6.2 and a forward price-to-earnings of 6.5. Its estimated growth rate for this year 27.1%, and for next year it's pegged at 1.2%. This is not a cash-rich company, since the total cash position on its balance sheet is $2.96 billion and its total debt is $7.80 billion. This stock currently sports a dividend yield of 1.3%.

The CFO just bought 25,000 shares, or about $972,000 worth of stock, at $33.91 per share.

From a technical perspective, Delta Air Lines is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending over the last month and change, with shares moving higher off its low of $32.60 a share to its recent high of $41.35 a share. During that uptrend, shares of Delta Air Lines have been making mostly higher lows and higher highs, which is bullish technical price action.

If you're bullish on Delta Air Lines then I would look for long-biased trades as long as this stock is trending above some near-term support levels at $38.27 or at $37 a share and then once it breaks out above some near-term overhead resistance levels at $39.20 to its 50-day moving average of $39.80 a share with high volume. Look for a sustained move or close above those levels with volume that hits near or above its three-month average action of 11.81 million shares. If that breakout takes hold soon, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $41.35 to $43, or even $44.50 to its 200-day moving average of $45.36 a share.