This Aviation ETF Is Flying Blind
If you don’t believe things are getting tough, consider this headline from June 26: “American Airlines, United Airlines move to allow full capacity flights.” That was the same day the United States recorded its single biggest increase in cases of COVID-19 since the start of the coronavirus pandemic!
Despite mounting evidence that it is too soon to relax social distancing restrictions, these execs can’t afford to wait. They are only too willing to put you in the line of fire to save their bottom lines.
It appears the prediction made by Boeing (NYSE: BA) CEO David Calhoun during an interview with NBC on May 12 may be coming true. In response to the question, “Do you think there might be a major U.S. carrier that just has to go out of business?” Calhoun replied, “Yes, most likely.”
At the time, Calhoun caught a lot of flak from industry insiders who felt he was biting the hand that feeds him. After all, Boeing sells a lot of the jets it manufactures to those very same carriers.
If anything, Calhoun may have been charitable in limiting the number of potential failures to only one. When Calhoun made that statement, demand for domestic air travel had plummeted 90% in the wake of the coronavirus pandemic.
Air travel started to recover in June. On May 12, the Transportation Security Administration (TSA) recorded 163,205 checkpoints. By June 25 that number had risen to 623,624.
That’s a vast improvement over May, but still far below the 2,280,522 checkpoints the TSA recorded on March 1 (that figure is only slightly less than the number of air travelers on the same day in 2019).
Now, a resurgence of COVID-19 cases in many states may cause travelers to reconsider their vacation plans. We are all tired of being cooped up with nowhere to go. However, a few days out of the house isn’t worth risking your life over.
The dismal state of the airline industry is reflected in the performance of the U.S. Global Jets ETF (JETS). This exchange-traded fund has lost roughly half its value since cresting above $32 in January.
The fund’s largest holding is Southwest Airlines (NYSE: LUV) at 12.2% of assets, followed by American Airlines (NYSE: AAL) at 10.7%, Delta Airlines (NYSE: DAL) at 9.8%, and United Airlines (NYSE: UAL) at 9.5%.
A contrarian investor might argue that now is the perfect time to buy JETS. Its share price is lower than it’s ever been and the coronavirus pandemic won’t go away.
Normally, I tend to agree with contrarian thinking. That’s why I recommended United Airlines in early April when travel stocks were getting crushed. Two months later, it had doubled in value.
If you had the courage to follow my advice then, congratulations! The other two travel stocks I recommended in that article, Marriott International (NSDQ: MAR) and Norwegian Cruise Line Holdings (NYSE: NCLH), also performed extremely well.
Unfortunately, the easy money in a travel stock rebound has already been made. Now comes the hard part. Do you think they will continue to rise, or will a second wave of COVID-19 push some of them over the brink?
Quite frankly, I can’t think of a single good reason to get on a plane right now. A lot of people crammed into a small tube breathing the same air for several hours is a recipe for transmitting the disease.
The pros in the options pits must be thinking the same thing. Last week while JETS was trading near $16, the put option that expires on September 18 at the $15 strike price was selling for $2.
Put options increase in value when the price of the underlying security goes down. For that trade to be profitable, JETS would have to drop nearly 20% over the next 10 weeks. And that’s on top of the 20% loss it has already taken during the past month.
At the same time, the $17 call option on JETS expiring on the same date was also selling for $2. Likewise, JETS would have to appreciate 20% for that trade to make money. That means options traders aren’t sure which way it will move next. What they are sure of is that move will be big, regardless of the direction.
It makes me nervous when the experts are that divided on a sector’s near-term outlook. They have access to information that I don’t, and even they can’t make up their minds.
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