Hedge Funds Are Bullish on These Airline Stocks

U.S airline stocks enjoyed strong rallies in 2013 and 2014, but suffered a disappointing 2015, with most airline stocks having ended the year in the red. Lower fuel costs and strong airline traffic did not provide these stocks with an expected boost, despite major airlines having posted record profits in 2015. Why? In a nutshell, investors have been paying more attention to PRASM, or passenger revenue divided by available seat miles, a metric that has been going in the wrong direction (south, that is), as opposed to revenue. Increased competition has led to companies transferring a portion of the benefit of lower fuel costs to passengers in the form of cheaper tickets. Currency headwinds and rising wages have also put pressure on air carriers. Nevertheless, investors are optimistic about U.S airline stocks going into 2016, and in this article we’ll look at how the crème de la crème of the investment world have positioned themselves in the sector.

At Insider Monkey, we track more than 700 hedge funds, whose 13F filings we analyze as part of our small-cap strategy. Our research has shown that imitating a portfolio that includes the 15 most popular small-cap stocks among hedge funds can outperform the market by as much as 95 basis points per month on average (see more details here).

At the end of the fourth quarter, 38 top hedge funds in our system had JetBlue Airways Corporation (NASDAQ:JBLU) in their equity portfolios, down from 42 a quarter earlier. Together, these funds had control over 7.1% of the company’s common stock. Jim Simons‘ Renaissance Technologies reported a 22% increase in its holding of the stock, to 4.55 million shares worth roughly $103 million. Cliff Asness is also bullish on JetBlue Airways Corporation (NASDAQ:JBLU), having increased his stake by 163% to 4.49 million shares during the quarter. Although not a darling of the hedge fund world, JetBlue Airways Corporation (NASDAQ:JBLU) had a very good 2015, having ended the year up by 40.4%. The low cost carrier is pushing on with its aggressive expansion plans into Latin America, having recently announced daily flights from Miami’s Fort Lauderdale-Hollywood International Airport (FLL) to Quito’s Mariscal Sucre International Airport (UIO) in Ecuador.

Based on Insider Monkey’s database, 52 elite funds are betting on Southwest Airlines Co (NYSE:LUV) as of December 31, down from 54 at the end of September. John Armitage’s Egerton Capital Limited holds the largest stake in the company among the funds we follow, having reported ownership of 15.4 million shares in its latest 13F filing, down by 9% compared to the end of the third quarter. Doug Silverman and Alexander Klabin initiated a position in Southwest Airlines Co (NYSE:LUV) during the quarter, accumulating 2.5 million shares valued at $107 million. Analysts at Credit Suisse have assigned an ‘Outperform’ rating to Southwest Airlines Co (NYSE:LUV) and have a price target of $55.00 per share on it, while JPMorgan Chase & Co. has a similar rating of ‘Overweight’, but a slightly smaller price target of $52.00 per share. The stock is currently trading at $42.75 per share, up by 2.5% for the year.

Turn the page to find out the top-three airline stocks that smart money investors are betting on.

The fan club of United Continental Holdings Inc (NYSE:UAL) gained a few new members over the fourth quarter, as the number of top funds invested in the company increased to 73 by the end of December, up from 70 a quarter earlier. Cliff Asness is betting on United Continental Holdings Inc (NYSE:UAL) as well, having also increased his investment in it over the quarter, by 50% to 6.14 million shares worth in the region of $352 million. United Continental Holdings Inc (NYSE:UAL) recently announced an increase in its share repurchase program for the first quarter, taking it to $1.5 billion, roughly twice the size initially announced. With shares currently trading at $58.25, the stock has returned to green territory for the year, trading up by 4%.

Hedge fund sentiment towards American Airlines Group Inc (NASDAQ:AAL) stayed roughly the same during the fourth quarter, as the number of long positions reported as of the end of December inched down to 76 from 77 as of the end of September. Phill Gross and Robert Atchinson are very optimistic about the prospects of American Airlines Group Inc (NASDAQ:AAL), having tripled their holding of the stock over the fourth quarter to 3.36 million shares valued at $142 million. American Airlines Group Inc (NASDAQ:AAL) is currenlty trading at a trailing Price-to-Earnings (P/E) ratio of 3.77, significantly lower than the industry average P/E of 10.00. Shareholders are also entitled to an annual dividend of $0.40 per share, which represents a yield of 0.95%.

According to our database, roughly 20% of Delta Air Lines, Inc. (NYSE:DAL)‘s common stock was held by 108 elite funds in our database at the end of December, which amounts to 14% of the funds tracked by Insider Monkey. Alex Snow, the manager of Lansdowne Partners, is still heavily invested in Delta Air Lines, despite a 9% reduction in his stake. At the end of December, Lansdowne Partners held 26 million shares worth $1.32 billion. David Tepper is also betting big on this stock, having increased his investment by 21% to 7.32 million shares valued at $371 million. For the fourth quarter, Delta Air Lines, Inc. (NYSE:DAL) reported revenue of $9.50 billion, down by 1.5% year-over-year, along with adjusted earnings of $1.18 per share, while analysts were looking for $9.61 billion in revenue and earnings of $1.19 per share. Analysts are recommending the stock as a ‘Buy’ and have an average price target of $63.27 per share on it, which represents upside potential of roughly 30%.

Disclosure: None