Airline Stocks Have Been Grounded, But ETF Could Soon Take Off

Fears that the COVID-19 outbreak will worsen and further stifle global business travel and tourism punished the U.S. Global Jets ETF (JETS) last week, but some market observers believe the recent dip in airline stocks could be a meaningful buying opportunity.

JETS seeks to track the performance of the U.S. Global Jets Index, which is composed of the exchange-listed common stock (or depository receipts) of U.S. and international passenger airlines, aircraft manufacturers, airports, and terminal services companies across the globe.

“Airline stocks are bearing the brunt of the markets’ coronavirus fears,” reports Al Root for Barron’s.

“That makes sense, to some extent. Global health fears and events such as the 9/11 attacks have, in the past, sent airline traffic plunging, and people on planes, after all, is the lifeblood of the industry. Travel always bounced back, but not before airlines started to buckle under the weight of their debt loads.”

Rough Timing

There’s never a good time for an epidemic, but the emergence of the COVID-19 outbreak dealt a blow to airlines operating internationally because China moved to curb Lunar New Year festivities and harsh restrictions on travel to and from the country are expected to crimp first-quarter profits for many JETS components.

That after the industry was profitable, broadly speaking, each year over the past decade. What’s more, China’s travel industry experienced a strong December, making the timing of the coronavirus outbreak all the more burdensome.

“China’s transportation industry expanded steadily in December 2019, an industry index showed Wednesday,” a report noted. “The China Transportation Services Index (CTSI) stood at 175.3 points in December 2019, up 5.3 percent year on year, according to the China Academy of Transportation Sciences.”

The transportation can be a key bellwether when it comes to assessing the health of the economy—if products are moving, the economy is grooving. The same goes for China, which saw its transportation sector rise steadily during the month of December. Plus, airline equities are attractively valued.

“After all, today the sector is more consolidated and profitable. And debt compared with earnings for the sector is in line with other industrial companies,” according to Barron’s. “But the price-to-earnings ratios that investors pay for the stocks don’t reflect the improvement. The sector trades for 6.4 times estimated 2020 earnings, a huge discount to the S&P 500 multiple.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.