It’s no mystery that Warren Buffett has been bullish on airlines lately. Airlines are facing huge tailwinds this year thanks to a cyclical upswing in the industry. The airlines can offer terrific returns for investors who buy and sell at the right times. But if you’re a buy-and-hold investor, you’re better off not using this strategy for a cyclical airline stock.
Airline stocks are a different kind of beast. If you get caught holding the stock during an economic downturn, then you could lose 60% or more of your original investment. Unlike other stocks held during a recession, an airline stock may take more than a decade to rebound to its high before the crash. If this scares you, then you should probably avoid investing in airline stocks or remember to take profits off the table when the stock hits the atmosphere, because the stock will inevitably go down.
WestJet Airlines Ltd. (TSX:WJA) is a ridiculously cheap stock that still has more room to run. The airline is considered a low-cost airline, which spends 25% less per mile flown than its peer Air Canada. Being a lower-cost airline has its perks. The company is able to keep its repair costs low and use its cash to pay shareholders a nice dividend. The company flew a record 22 million passengers last year, and it looks like the trend of increasing passengers will continue into this year.
According to the CFO, WestJet is looking to invest in “more fuel-efficient” planes for its overseas expansion. The company currently uses Boeing 767 aircraft for its overseas flights, but it is considered an “old plane” that is not the most fuel efficient.
The management team at WestJet is a relentless cost-cutter and not afraid to spend money to improve the long-term operational efficiency of the business. The Boeing 767 aircraft is quite expensive to operate, so it will be interesting to see what type of new aircraft WestJet will choose for its overseas flights.
WestJet is dirt cheap right now and could offer upside with a nice margin of safety at current levels. The stock currently trades at a 9.4 price-to-earnings multiple with a 1.4 price-to-book, both of which are lower than the company’s five-year historical average multiples of 11.4 and 1.8, respectively. The price-to-sales and price-to-cash flow are also considerably lower than historical averages, and the dividend yield is 0.5% higher than it normally is.
If you’re a deep-value investor looking to capitalize on an attractive environment for the airlines, then WestJet is a terrific play. Collect the 2.4% dividend yield while you wait for the stock to take off. But make sure you take profits off the table when you can because the stock will inevitably fall once the economic environment reverses.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette has no position in any stocks mentioned.