One more piece on airlines and off course I endorse the value concept that Arne elucidates... too much capital
flowing to a sector creates overcapacity, bad business decisions and lets expenses run up as fiscal management
gets lax. When capital leaves a sector, some companies go out of business, merger, and reduce costs, all of
these enable profits to grow nicely when a rebound comes.
And since most industries have to deal with exogenous price cycles that impact their business, when these
price cycles become more favorable that gives a multiplier effect to the greater efficiencies and operating leverage
that has occurred during the bankrupcy, merger and cost cutting lean period. Airlines are a great example as
they have been hit by the much higher energy prices, but a return to 19$ a barrel will help pave the way to easy
cost comparisions with the year earlier period.
..........NWAC also,could be interesting.... but I'm being patient for the moment.
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The Turnaround Artist
Going With the Capital Flow
By Arne Alsin
Special to TheStreet.com
4/17/01 9:31 AM ET
URL: thestreet.com
If investors would simply step back from the noise that is Wall Street and watch capital flows, they could comfortably identify many profitable opportunities. Capital is in a never-ending search for big and easy profits. Once a sector has been flagged as yielding large, easy profits, capital pours in, sometimes in a torrent, until capacity can meet demand.
And each time a sector gets particularly hot, the flow of capital eventually exceeds the ability of the economy to absorb it. From telecommunications to networking to the Internet, capital flows in recent years have caused major dislocations in the real economy, principally from the buildup of excess capacity.
Profiting From the Capital Cycle
As an investor, it is the flip side of the capital cycle that interests me. I am attracted to sectors or industries in which there is capital flight. Assuming demand is growing, to the extent capital leaves a sector, the inevitable consequence is higher profitability for the surviving companies.
In the retail sector, I recommended J.C. Penney (JCP:NYSE) in a December column (it has since traded up 70%) and again in a March column. There is much evidence that capital flows currently favor J.C. Penney. The liquidation of Montgomery Ward's and bankruptcy of Bradlees, combined with store closures by many mall-based retailers, suggest capital has sobered and rationality has returned to the sector.
Another example of improving capital flows is in office-product retailers. Office Depot (ODP:NYSE) and key competitors have closed numerous stores and have introduced smaller store models. The capital equation is now tilting in favor of investors -- funds devoted to expansion in this sector are limited, while demand continues to increase. I first recommended Office Depot at the end of December and today at $9 it is up 30% and still a terrific idea. I expect it to trade over $20 in the next year or two.
Buy the Airlines
Because I am a value investor, almost all of the companies in my portfolio are struggling with a host of problems. Viewed from any vantage point, business at the airlines stinks. Rampant union squabbles, high fuel prices and problematic revenue caused by the slow economy all make for a tough backdrop. Almost every negative imaginable is hitting the sector simultaneously, but those negatives have been factored into the stock prices.
Capital flows could not get much more positive for investors in airlines. In the face of strong projected growth in demand for the rest of the decade, capacity growth is negligible. TWA is being folded into AMR (AMR:NYSE), the parent company of American Airlines, and perhaps US Airways (U:NYSE) will be gone soon as well. And whenever the airlines lose money, as they are doing now, capital retrenches and becomes more efficient as cost savings are pursued.
Northwest Airlines
I have already recommended United Airlines (UAL:NYSE) and Delta (DAL:NYSE) in prior columns. I am adding the world's fourth-largest airline, Northwest Airlines (NWAC:Nasdaq), to those recommendations. Northwest just booked its worst quarter in years. Operating leverage at Northwest, like most of the airline group, is pronounced. When times are bad, they are very bad, but when the cycle turns up, profit gains come fast and furious. In order to maximize gain, investors have to buy airlines, like Northwest, during down cycles when the stocks are heavily discounted.
Down, Down and Away?
Arne Alsin likes to buy the airlines when they're in tailspins. Case in point, Northwest.
You don't have to stretch the imagination to see the potential for a nice gain in Northwest Airlines. Solid growth in revenue, book value and cash flow over the last several years suggest that the current quote, at about $23.50, is a bargain. The stock has traded in the mid-$30s for six consecutive years, with a high of $65 in 1998. Pocket a 50% gain with Northwest as the stock returns to at least the mid-$30s by next year.
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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, Alsin or clients of ACM owned J.C. Penney, Office Depot, United Airlines, Delta Airlines and Northwest Airlines, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to arnealsin@home.com.
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