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Sometimes it is good to look at the broader issues surrounding our investing to get the "big picture." Before we get to today's stock, I am going to address what we mean by "value."
Some Rambling Thoughts About Value
A common question from my articles is something along the lines of, "Yes, fine, what you wrote is great, but what is the real value of the stock?" There is nothing wrong with this (or any other) question. Want to know the "fair value," well, that's just natural. But that is a loaded question.
In my view, and you are free to disagree in the comments below, questions about value simply reflect a search for certainty in an uncertain world. Value is always subjective and relative. In the stock market, it is particularly imprecise and really almost a non sequitur.
The market doesn't set any value other than the current price. There is no other "value." Probability is our business - the probability that a stock will give us what we want. But that has little to do with some arbitrary "value."
A major problem with value determinations is that different investors look for different things. One investor is looking for a volatile stock being touted on bulletin boards that is likely to go up in the next five minutes, while another wants reliable monthly income and may not really care what their stock does in the next week, let alone the next five minutes. The only way the market has to balance all these different investor desires is the current price of the security.
"Value" will change for a lot of reasons that have nothing to do with anything intrinsic to a company. In 2020, the portfolio of Cathie Woods soared because investors saw hidden value in her portfolio of "transformative" companies. Her funds' performance in 2021, though, was not so hot. I'll show in the chart below how some hot stocks of 2020 fared in 2021.Data by YCharts
Did the hot stocks of 2020 become dogs in 2021 because the value of her companies changed? Why sure - the value measured by the price of her stocks went down. But the companies are still chugging along and doing the same things regardless of their price swings. Something did change, but it wasn't their "inherent value." What changed was simply investor sentiment.
I'll give you a specific example. In early 2021, Costco Wholesale Corporation (COST) fell hard from over $380 to under $320. I recall some "deep value" investors saying they would not even consider COST until the stock hit its "fair value" around $275. That apparently was close enough to a 15x price multiple to suit them. I commented about this at the time because the stock looked oversold and COST never trades at a 15x multiple. Why not? Because investors always value it higher than that, and what the crowds of investors think matters. So, using the wrong "value" yardstick cost some investors a lost opportunity.Data by YCharts
In my view, value is relative to what you want and relative to a company's own track record. If you want a reliable 3% monthly dividend, a stock offering that may be more valuable to you than to the general market as reflected in the current price. It thus is "cheap" even if the market thinks it is fairly priced right where it is. That is what makes a stock a good value, not what multiple it trades at.
There is nothing wrong with being a Benjamin Graham disciple who thinks there is some kind of "intrinsic value." If that works for you, don't change! I think Graham is a great starting point as long as you take into account fundamental changes in the market since then. Graham said "Buy not on optimism, but on arithmetic," and numbers certainly are always important. He also wrote:
The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.
This is great advice about paying attention to dividends and company performance. However, the explosion of index funds and the influx of a different spectrum of investors have changed market dynamics since the 1950s. The "market" now is important as well for entry points. The market also is important for relative valuations between different stocks.
Warren Buffett is the most prominent Graham disciple and built his fortune with that strategy. However, the past two decades have been a little less spectacular for Buffett. He always has been a terrific investor, but a top investor also has to change with the times.
Berkshire Hathaway performance over the past two decades.
In the 1950s, stocks were controlled then by a tight community of professionals who saw the world similarly. Investing now, with exorbitant brokerage fees gone and many more online tools available, is open to more types of investors who have a wide variety of viewpoints. New money has flooded into the stock market, particularly since the pandemic. Hype and publicity, which began taking over the market during the dot.com era, are more important than ever if you are looking for flashy gains (and losses).
One reason Buffett has not outperformed as he used to might be that the market has shifted over the past couple of decades as the Internet has taken hold.
Historical SP 500 price/earnings ratio.
A market p/e of 30 was unheard of in Graham's day. But that is the world we live in and good investors must change with the times.
We can debate what today's investors are looking for versus those of the past all day long. It is clear that the market no longer values companies by the old yardsticks. If it did, COST would have sold down to the level the value guys wanted. The SP 500 Index may be "overvalued" at a p/e of 30, but a quick glance at the chart above will show you that the average multiple has increased dramatically since the 1950s. You could be waiting a long time before you see it under 10 as it was during much of that decade.
There are also value investors who rely on book value or total assets. That can be reassuring because it provides the illusion of certainty in an uncertain world, but the value of a going concern is intricately related to its business prospects. Liquidation value is uncertain and you probably don't want to hold a stock through a company's liquidation anyway. If you think cash on the balance sheet is likely to find its way into shareholders' pockets after management runs the company into the ground, think again.
So, if the old yardsticks such as p/e are misleading or downright obsolete, how do you value stocks? Opinions on this will differ, but I look for a variety of things. A thriving, financially stable, and hopefully growing quality company in a sector with good prospects is enticing, but so is a company that is in an unloved sector but is making the right moves for when conditions improve. I evaluate stocks based on their own history, the benefits that flow through to shareholders, and the company's likely prospects. I then weigh all that against the current stock price.
If you keep an open mind, this way of thinking will lead you to interesting candidates that you might never even consider otherwise. Value crops up in odd places sometimes.
Okay, on with today's stock. I am going to reverse my usual thematic approach because this play runs completely counter to my usual income stocks.
Everything Looks Bad For JetBlue
JetBlue Airways Corporation (JBLU) has had a terrible two years. It is no secret that the airline industry has been one of the prime casualties of the COVID-19 pandemic. There is a continuing avalanche of bad news about the entire sector.Data by YCharts
Questions about the airlines these days revolve around how many cancellations are being made, when the next virus variant will strike, and the like.
The headlines have been full of doom and gloom for the airlines for almost two years. "U.S. airlines' 2020 losses expected to top $35 billion as pandemic threatens another difficult year," CNBC trumpeted just over a year ago. The same headline probably would apply to 2021, too. "Airlines Cancel More Than 1,300 Flights," the Wall Street Journal reported just a couple of weeks ago. "Will airline hubs recover from COVID-19?" was the recent headline from McKinsey Co.
According to McKinsey, airlines will survive as long as they take McKinsey's suggestions. For starters, they must "update their operations and network strategies." While the standard hub model remains relevant, McKinsey thinks the airlines need to reshape their networks by eliminating things like duplicate hubs. Other suggestions include using smaller aircraft to service secondary cities, using more efficient airplanes, scheduling more nonstop flights, and using data better.
JetBlue's annual financial results show how hard the pandemic has been on it.
JBLU Total Revenues Net Income Diluted Earnings/ Share EBITDA Net Debt Shares Outstanding 2016 6,584.0 727.0 $2.13 1,621.0 413.0 337.0 2017 7,012.0 1,140.0 $3.45 1,356.0 506.0 321.0 2018 7,658.0 189.0 $0.60 1,124.0 1,714.0 306.0 2019 8,094.0 569.0 $1.91 1,287.0 1,824.0 282.0 2020 2,957.0 (1,354.0) ($4.88) (1,506.0) 2,675.0 316.0 TTM 4,865.0 (426.0) ($1.38) (843.0) 1,678.0 318.0
TTM is Trailing Twelve Months as of September 30, 2021. Total Revenues, Net Income, EBITDA, and Net Debt in $millions. Shares Outstanding in millions. Net Debt is as of the last report. Source: Seeking Alpha.
There isn't a lot of good news in JBLU's annual figures. While the company was on a good trajectory through 2019, with Total Revenues, Net Income, Diluted Earnings per Share, and EBITDA all showing healthy progressions, the last two years have been terrible financially. All of the key figures are down sharply since then.
JetBlue's current troubles make it a special situation. This is not a company I could ever recommend based strictly on its recent financial history. It does not pay a dividend, it is losing money, and its recovery is nowhere near complete or assured. According to traditional valuation, JetBlue is a non-starter.
Some analysts are very down on the stock. MKM Partners, for instance, recently downgraded the stock even as they were upgrading other airliners. That was like a double "ouch." The reason, apparently, was that JetBlue is a domestic airliner while MKM thinks international and corporate services will do better.
Seeking Alpha's Quant Rating currently is neutral on JBLU and around its long-term lows.
Seeking Alpha's Quant Rating for JetBlue
Everyone is waiting hopefully for the end of the pandemic, and then "all will be better." However, the recent ultra-contagious omicron variant has made the forecast "cloudy." Even those who think the pandemic will end in 2022 caution that a number of factors will have to break the right way, such as getting sufficient people vaccinated.
JetBlue insiders have been selling. This includes CEO Robin Hayes, who has been selling regularly since at least last summer and as recently as 3 January 2022.
JetBlue Insider selling.
The company's price chart was doing fairly well early in 2021. However, ever since the virus mutations began showing up last summer, the stock has badly lagged the SP 500 Index.
JetBlue one-year chart versus the SP 500 Index.
Overall, by all objective measures, JetBlue looks like a disaster. So, why am I even talking about it? Read on.
JetBlue Will Survive and I Like It Because The Market Hates It
Sometimes, you have to look past the numbers. If you read through my long ramble about value above, you now know I included it. A company's financial performance tells you about the past while investing is about the future. In these troubled times, looking past the numbers may pay off in the long run.
JetBlue is in the midst of a "double-dip." While not as tasty as a big ice-cream cone, a double bottom often foretells a rebound. The stock pattern may be forming a cup, which is a bullish formation.Data by YCharts
As shown in the chart above, JBLU fell below the 200-day moving average last summer and remains below it. Market technicians will gladly tell you that this means the stock is in a bearish posture. With the omicron variant running wild, this is understandable.
However, the more I look at the chart, the more I like it.Data by YCharts
For one thing, JBLU's volume has not confirmed the pullback over the past six or so months. If there were serious concerns about the company's survival or long-term prospects, you would expect volume to increase as worried shareholders dumped their shares.
As shown in the graph above, that hasn't happened. In fact, trading activity remained fairly dull through the last half of 2021 and into 2022. That was completely different than the volume surge that accompanied the selloff during the onset of the pandemic in the spring of 2020.
This suggests to me that investors, in general, understand that there will be rough patches on the road to the resolution of the pandemic but there is no sense of doom or panic. While a lingering disease is not good for the airlines or most anyone else, it also is not the end of the world. I like these kinds of divergences, where two things that should happen together in a really bad situation do not confirm each other.
I mentioned above that MKM Partners recently (3 January 2022) downgraded JetBlue to Sell. The stock price did not fall because of that rating, however, and actually went up shortly thereafter. That type of backward price behavior is always a tell to me that sentiment on a company already is so bad that it may have happier days ahead. The contrarian in me sees "Sell" ratings as indicating the bottom may be at hand or close.
By some measures, JetBlue's value is actually quite high right now. According to Seeking Alpha's quantitative analysis, JBLU gets a grade of "A" for valuation. It also gets an "A+" for price/cash flow, an "A" for price/book, and good grades in other valuation areas, too.
We saw above that JetBlue's Total Revenues have fallen drastically since the onset of the pandemic. However, the stock's price-to-sales ratio is back to its normal (pre-Covid) levels below 1.0.
JetBlue price to sales ratio over the past three years.
What this suggests to me is that the stock has adjusted downward appropriately to reflect the effects of the pandemic. In other words, the stock is now priced as if the reduced airline passenger traffic that typifies the Age of COVID is a permanent condition.
But, if and when the pandemic does go away, JetBlue's sales should rebound hard, perhaps to new highs. Without all these cancellations and sick crew members, you would think revenues would have to surge. If JBLU's relatively conservative price-to-sales ratio just stays the same during that revenue surge, we should see a big price rebound to reflect that happy fact.
But will traffic (and thus sales) actually rebound someday? Well, Morgan Stanley thinks so. In fact, it expects airline traffic to rebound to normal within the next six months and move higher from there. Incidentally, Morgan Stanley also has an Overweight rating on JBLU (along with several other domestic airliners).
To be honest, I am not sure why some analysts favor international carriers. According to McKinsey, international travel fell 81% year-over-year (through last August) versus falling only 51% for domestic travel. This relative stability has been to the benefit of airline companies such as JetBlue.
JetBlue also is making efforts to enter the coveted international market. For instance, it will launch two new non-stop flights from Vancouver to New York and Boston later this year. These will be JetBlue's first services to a Canadian destination. Yes, it's not like it's Hong Kong or India, but baby steps, baby steps. Service already has begun to London, and Latin America has been part of the schedule for some time. The sky's the limit!
The company is taking other steps to make its operations more efficient. It has formed an alliance (the "Northeast Alliance," which seems an odd name considering Northeast Airlines was bought out by Delta in 1972) with American Airlines in which booking a flight with one airline may lead to sitting in the other airline's plane. I'm not sure why this upsets some people, as it is not as if AA is a fly-by-night outfit. The Department of Transportation approved this arrangement in January 2021. Thoughtful innovation is good whether it ultimately succeeds or not. Plus, if there is a wave of consolidation in the airlines, AA and JetBlue now have seats in the same row.
Mergers in the airline space are nothing new. Some of you may remember that American Airlines acquired US Airways in 2015 (actually, it was the other way around because it was a reverse merger). This was due to financial hardship flowing from the 2009 recession. I would not be surprised at all if some in the back room at AA are casting covetous eyes at their new alliance partner. Things might happen if the pandemic lingers and causes a shakeout in the industry as it did after the "Great Recession." Let me caution that this is sheer speculation on my part and there could be 100 reasons why an AA-JetBlue combination would never happen.
Regarding the McKinsey recommendations for airlines mentioned above, JetBlue is ahead of the game. It does not even have a primary hub, so no duplication inefficiencies there. Instead, it calls JFK in NYC its only operating base. The company also is well known for preferring nonstop flights, and it also has acquired new jets (such as the Airbus A321 Long Range (LR)). It is almost as if McKinsey studied JetBlue closely before making its suggestions.
Meanwhile, JetBlue is busy trying to make its employees happy. It reached an agreement with the Transport Workers Union (TWU) last month and is busy hiring new employees. That doesn't sound like a company that is on the ropes.
Fitch Ratings doesn't think so, either. It affirmed a BB- credit rating on the airline last fall. While not investment grade, that is a good rating for a company that is going through the kind of turmoil JetBlue has weathered.
Returning to the annual figures I posted in the section above, JetBlue is not acting like a company in trouble. While the total share count has risen since the pandemic hit, it still remains below 2017 levels.
Due to the omicron variant's impact on flight cancellations and crew health, past company growth projections should probably be taken with a grain of salt and so I won't even mention them here. As CEO Hayes said recently about omicron, "I really think there's no way to plan for that adequately...things are likely to get worse before they get better."
Analyst price targets for JBLU.
What we have here is a very uncertain situation for the airlines. The market hates uncertainty, and JBLU's price has fallen to reflect that. The stock remains near its 52-week lows. But some see the silver lining. With JBLU trading under $15, analysts see it rising to $18 within the next year. Personally, I think it will get back to its 2021 highs over $20 by the end of the year. If you are looking for a solid contrarian play, JetBlue may fit the bill for you.
JetBlue is out of favor but not out of luck. It is one of those stocks you pick up when you decide to do some dumpster diving. Not the core of your portfolio, but a fun speculative play. The entire airline industry is having issues, but this, too, shall pass. JetBlue's poor financial performance over the past two years and is why it is trading down, but there is a lot of potential upside. If you are looking for a good value, however you choose to define that, JetBlue offers a very interesting case. Just be willing to hold until the pandemic fades away.
This article was written by
I had my first passbook savings account in the 1960s, which taught me to invest, and lost money in the 1987 crash. Subsequently, I have run investor chat rooms and an investing blog. I have traveled across the country to lecture on investing, which is a lot of fun because it is great to meet fellow investors. I also am a published author (aside from SA) and maintain a blog covering many different topics at Filminspector.com. I bought my first property in 1993. Real estate is my passion and I enjoy writing about it. I usually invest in income stocks such as REITs, but also follow, invest in, and occasionally cover other areas in articles. I also write in various forums about World War II. Oh, and I was mentioned in "Scam Dogs And Mo-Mo Mamas: Inside the Wild and Woolly World of Internet Stock Trading" (ISBN-13: 978-0060196202) (2000), by Wall Street Journal reporter John R. Emshwiller.
Disclosure: I/we have a beneficial long position in the shares of JBLU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.