Initial portfolio allocation for the 2018 Capitalize4Kids winter competition

Since concluding the fall competition, Capitalize4Kids has decided to run a much shorter stock market challenge kicking it off into 2018.

Once again, I have signed up. This time, I have decided to pursue a more aggressive strategy by focusing on my same top-down based analysis. First. I will take a look at the key macros and recent news events. Next, I will identify either specific sectors or companies that I believe will show strong potential in the upcoming months.

As for my initial investment thesis, I would like to refer back to the panic sell-off of the airline industry as a whole. If there’s one thing it taught us, space is a commodity and we, as humans and passengers, are pretty tolerable.

United led the sell-off yesterday when it announced plans to add 4% to 6% to its passenger carrying capacity this year continuing this trend to 2020. Investors feared this move will lead to a price war as airlines severely discount the prices to reach as close as possible to a 100% carrying capacity. Meanwhile, British Airlines is also leading the move towards non-reclining seats. What does this move imply? More room to add seats perhaps. The official reason for the non-reclining seats is a cost savings method as reclining seats tend to break and are costlier to maintain, which is said to run up to $3.5 million (USD) to its expenses. Non-reclining seats also tend to be lighter so less fuel will be used.

I believe this price war fear is another typical overreaction. I don’t believe it will happen IF these airlines understand game theory. This appears to be almost a classic case of the prisoner’s dilemma where it is in each airline’s long term interest to not compete on price. By competing on price, these airlines will literally drive each other into the ground. I would expect more airlines to follow the footsteps of British Airlines where they strive to maintain competitive on a non-price basis.

According to Bloomberg, short sellers are up $314 million mark to market basis today of their $5.15 billion short exposure. Is a short squeeze coming or is it underway? I believe the significant drop where the average publicly traded airline declined 4% is sufficiently an oversold status. In the near term, short sellers would be tempted to cover or at least partial cover their positions. Given this drop, I highly doubt further short entries are to be expected.

Without jumping too far into the future as this competition is only for 2 months, my current trading plan involves being heavily invested into this sector buying yesterday’s dip.

Current list of airlines I am looking to long:

  • Delta Airlines (DAL)
  • United Continental (UAL)
  • Southwest Airlines (LUV)
  • Spirit Airlines (SAVE)
  • Alaska Air Group (ALK)
  • JetBlu Airlines (JBLU)
  • Allegiant Travel (ALGT)
  • Hawaiian Holdings (HA)
  • Sky West Inc (SKYW)

I will not be buying into American Airlines (AAL) since its earnings release is due later today pre-market so it will be unlikely for me to enter.

Summary:

  • Short term long positions based on oversold price behavior
  • Long term, rather uncertain if price war will break out
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