George Soros is one of the greatest investors of all time.
In 1973, he founded the Quantum Fund. Over the next two decades, Soros would go on to earn billions of dollars for his investors. Thanks to that type of performance, his name is now synonymous with high finance.
For this reason, I’m always watching what stocks George Soros is buying. And right now he’s making some big bets in transportation.
Triple-Digit Gains Are Possible in This Sector
Over the past few months, George Soros has been building stakes in one of the world’s most hated industries.
Buried inside a recent Securities and Exchange (SEC) filing, the billionaire investor hinted he is getting bullish on airlines. According to the 13-F disclosure, Soros now owns a position in several carriers, including Jetblue Airways Corporation (NASDAQ:JBLU), Spirit Airlines Incorporated (NASDAQ:SAVE), and Delta Air Lines, Inc. (NYSE:DAL). (Source: “Soros Fund Management – Stock Holdings,” Insider Monkey, last accessed April 26, 2016.)
It’s an odd bet. Airlines have developed a bad reputation with investors…and for good reason.
The industry is capital-intensive. Barriers to entry are almost non-existent, given anyone can buy a plane and hire a few pilots. Consolidation of existing players can reduce supply—for a while. But when word gets out that the industry is making good profits, somebody will come up with the bright idea to start another carrier.
That’s why it may be hard for some people to believe the industry is turning the corner. Last year, the industry reported record profits, operating incomes, operating margins, passenger revenues, and passenger load factor (a measurement of how many seats are filled). This was mostly due to lower oil prices, but big cost cuts and cramming more people into planes have also boosted margins. (Source: “Airlines Are Swimming in Profits Thanks to Cheap Fuel, High Fees,” Time, January 21, 2016.)
Some investors will dismiss these numbers as just being part of the latest cycle. But trolling through quarterly results, you can’t help but feel the industry has addressed some of the issues that have plagued it since Kitty Hawk.
Fuel costs? Most airlines have replaced their old fleets with new, ultra-efficient jetliners. And by introducing fuel surcharges, carriers have effectively passed on high energy prices to customers.
Competition? The old price wars between airlines have died down to a dull skirmish. After a series of mergers, the industry is starting to resemble a cozy oligopoly.
Cycles? In the past, carriers would flood the market with new routes whenever the economy ramped up. This cycle, though, executives seem to have learned their lesson. Most airlines are opting for fewer, more profitable routes rather than grabbing market share.
You may have noticed this yourself. Finding a cheap fare is like searching for a needle in a very large haystack. And all of those extra fees from baggage to headphones have turned these companies into moneymaking machines.
For all of these reasons, airline stocks have entered a huge, multiyear rally. The NYSE ARCA Airline Index (INDEXNYSEGIS:XAL) has surged more than 60% since the first quarter of 2013. Many individual names have delivered triple-digit gains over the same period.
Chart courtesy of www.StockCharts.com
In many ways, the airline business could be seen like the rail stocks in the 1980s. For more than a century, railroads were a terrible business. High costs and extreme competition forced many to close shop.
Today, the industry is a collection of a few near monopolies in their respective markets. High barriers to entry make it impossible for any upstart to break in. As a result, billionaires like Warren Buffett are clamoring to take these prized assets private.
Are airlines in the middle of a similar transformation? It’s possible. And if so, savvy investors like George Soros stand to make a fortune.
The Smart Money Is Betting on Airlines; Should You?
But one word of warning: the smart money is starting to catch on.
According to recent SEC filings, there have been noticeable upticks in hedge fund activity in carriers like Southwest Airlines Co (NYSE:LUV) and United Continental Holdings Inc (NYSE:UAL). Billionaire Jim Simons has also built up a huge position in Delta Air Lines. (Source: “Hedge Funds Are Bullish on These Airline Stocks,” Insider Monkey, March 1, 2016.)
What could have these money mavens so excited? I’d say it could only mean one thing: they see a big rally ahead.