The Stocks

What to Trade: Buy US Airways (NYSE: LCC) under 9.25 with a stop at 5.90; short First Solar (NSDQ: FSLR) above 110 with a stop at 145.

Why Now: US Airways stands to benefit from lower fuel costs and an increase in business travel. First Solar operates in an industry that faces a glut of overcapacity and will suffer as EU governments reduce financial support for green energy.

The Story

Restaurant Owner: Hello, Elliott!

The proprietor of Restaurant 21 welcomes Elliott back to Greece and his favorite Athenian restaurant.

Elliott’s Greek friends have gathered for dinner, eager to catch up and discuss about economics and investment issues.  

Elliott has a drink in hand, and the hugging session comes to an end.

Yiannis: How was your trip, man?

Elliott: The trip was good, and the plane was full. Maybe the Americans will help you guys out once again–this time through tourism. I’m doing my part.

The boisterous Greek chorus drinks to that suggestion, laughing loudly.

E: You know, this trip gave me an idea for Stocks on the Run.

Y: Airlines?

E: Was it that obvious?

Y: Man, I think you are still dizzy from the flight.

E: Oh yeah? I’ll take it to the people–after all, this is the birthplace of democracy.

Y: What people? What are you talking about, man?

E: Listen. Yiannis and I have this friendly stock-picking competition that morphed into a monthly newsletter where we discuss what stocks investors should buy now. The stakes are high; whoever’s picks underperform usually picks up the tab on a nice dinner. Yiannis is skeptical of my latest long idea; why don’t you guys listen to both sides and vote on what we should do.

After the waiter takes everyone’s order, the wine starts flowing and Elliott shares his latest pick.

E: The bottom line is that the cycle is positive for the airlines right now because of strong fundamentals. The main upside catalyst is that air traffic is on the rise again, with business passengers leading the way.

Y: Man, you’ll have to order me a few more bottles of wine to get me to buy into that. Business traffic is no more than 40 percent of airlines’ business, and consumers’ balance sheets are not in the best of shape right now.

E: Yanni, I think you’ve been hanging out in Greece for too long. Your investing sense has weakened. Perhaps this will help.

Elliott flags down the waiter and orders his co-editor a drink.

Y: Thanks. I’m starting to come around but still have my doubts.

E: Look, business travel accounts for three-quarters of the industry’s total revenues. Forget about consumer traffic. Airlines are a play on recovering corporate spending.

Y: Ok, I’ll give you that. But you can’t explain away the balance sheets–trust me. US-based airlines lost more money from 2001-09 than they made in profits over the previous 20 years. Are you sure you’re not considering a short position?

E: Airlines probably aren’t a great play for long-term investors, but there’s plenty of opportunity to book a short-term gain. In fact, I’d recommend that you follow my advice; you can use the profits to pay for your return ticket at the end of the summer. You might even have some money left to take me to dinner.

Airlines are fast-moving stocks and if you catch the cycle right, it’s not unusual for the stocks to move 50 to 100 percent in a month or two.

At this point, Elliott orders a huge portion of fresh apricots, which distracts him–and the rest of the table–from his little experiment in democracy. Elliott takes to apricots like a monkey to peanuts. 

Restaurant Owner: I bought two extra kilos just for you, man. Eat up.

At this point Elliott’s mouth is so stuffed with apricots that he can only nod his head in acknowledgment. Meanwhile, everyone at the table stares, agog.

Finally, Elliott’s lust for apricots is sated, and he flashes a satisfied grin.

E: Yiannis, you know you’re paying for those apricots and the rest of the meal, right? You lost the annual “Race to 21” bet.  

Y: Not fair! We were stopped out of the position during an absurd technical glitch in the New York Stock Exchange. It doesn’t count!

E: Ah, a solid southern European argument. I saw that one coming. That’s how you deal with financial hardship: strikes and protests. I watch the news. Some things never change.

Y: You may be right about that, but our bet was different.

E: Ah, the classic Greek mantra, “My situation is different than the other guy’s situation!”

Yiannis doesn’t look happy. Elliott realizes he’s overstepped his bounds and changes his tack.

E: What happened? Come on, man, I’m just joking. I know it was a technical glitch, but you can still pay for something–maybe a couple of bottles of champagne to celebrate my return.

Y: Done.

E: Now that the champagne is taken care of, let’s get back to the airlines. Lower fuel prices are another positive for airlines. There’s no comparison between today and two years ago, when fuel costs soared to $57.8 billion. But oil prices are off recent highs and should remain weak for the rest of the summer; lower oil costs during the peak summer travel season should boost profitability even more.

Y: But airlines hedge their fuel costs–this is a moot point.

E: Not all airlines hedge against higher fuel costs, including the one that brought me here. US Airways (NYSE: LCC) hedges only minimally, so the company should benefit disproportionally from lower oil prices this summer.

Y: US Airways? You like them because you have special flying status with them, and you like to hang out with Roger in their airport lounges. Clearly, you’ve researched this pick well.

E: True, they treat us right–but that’s not the real story. The stock is poised to soar. The company restructured five years ago, making it one of the lowest-cost major airlines in te US.

At this point, the crowd has decided that Elliott’s idea has merit and should be this month’s recommendation. Some also suggest that if Yiannis still disagrees, the two should consider a play on alternative energy.

Y: We could do both. After all, we promised our readers a bonus pick because of Independence Day.

E: Trust me: The best way to profit from green energy is by going short.

Now the conversation steers toward something that many Europeans and Americans share: a fondness for the idea of green energy. Of course, numbers are a different matter entirely.

E: My Greek friends, you do realize that wind, solar, geothermal and biomass power account for only 2 percent of the EU’s energy consumption?

George: Fair enough. But that provides plenty of scope for alternative sources to catch up.

E: I wouldn’t count on that at this juncture. Renewable-energy stocks amount to a play on government largesse and subsidies. Accordingly, the sector likely will be hit hard by the EU’s sovereign debt problems and fiscal-austerity measures.

Alexis: Yes. But European governments have said they will support green energy projects.

E: Perhaps this support will be more verbal than financial; many countries lack the wherewithal to follow through while they get their financial houses in order. Consider Spain. In 2008 it accounted for half the world’s solar-power capacity. The government has already slashed subsidies for solar power and, given the state of its public finances, these subsidies are unlikely to be restored. Germany also hasn’t been very vocal about replacing the solar power subsidies that were reduced on July 1.

Dimitris: But what about the US? Your President Obama has been very vocal about this stuff.

E: Although some subsidies and tax breaks for renewable energy will be part of a future US energy bill, such a bill is unlikely to pass this year. And any US energy bill will need to include support for natural gas and nuclear power to attract Republican support–the President is not king, you know.

The Obama administration recently announced $2 billion in loan guarantees to kick-start two solar power projects in the US. This was part of the $787 billion stimulus package passed at the height of the financial crisis, but that funding is winding down and many in Congress are opposed to more spending with the government’s finances deteriorating rapidly.

At any rate, from an investment standpoint, I don’t see the US picking up the slack left by falling EU support for alternatives.

D: Ok, what’s your short play?

E: First Solar (NSDQ: FSLR) is a good candidate.

A: But this is a giant in the green-energy field.

E: I’m not disputing that First Solar won’t be a winner in the solar-power space over the long term. But in the here and now, there’s a glut of polysilicon solar cells. And some of the Chinese solar manufacturers have low cost structures as well.

Y: Remember that First Solar is a high-priced stock that’s capable of making dramatic moves. There’s also plenty of volume

E: Exactly! This is the stock that will make a decisive move if investor sentiment sours on alternative energy. It’s also a good time to short First Solar because the stock has rallied primarily because of the US government’s positive comments about alternative energy in the wake of the Macondo spill. Let’s take advantage of the hype to get a good entry price on the short.

New Trades:

US Airways (NYSE: LCC)–Buy < 9.25, Stop-Loss @ 5.90.

First Solar (NSDQ: FSLR)–Short > 110, Stop-Loss @ 145.

Open Trades:

PennWest Energy Trust (NYSE: PWE)–Buy < 23, Stop-Loss @ 14.

ProShares Short Russell2000 (NYSE: RWM)–Buy < 44, Stop @ 37.15.