As crude oil continues its nasty downturn, now off 20% since the start of May, airline stocks (^XAL) have been catching a higher bid as investors finally show interest in the long-forgotten travel sector. Stocks like Delta (DAL) and United Continental (UAL) are far outperforming peers like Southwest (LUV), a company known for smart oil hedging in the past.
"If you look at them [Southwest] over the last month or three months, and you compare them to United or Delta, or any of the other major airlines, you will see underperformance like crazy, and it's because they're hedged," says Jon Najarian, co-founder of TradeMONSTER.com. Najarian calls LUV "a disciplined hedger," which works well on the upside, but when crude comes down, it's a drag on the company and is now being reflected in the stock price.
Nearly all legacy carriers are sharply higher this year, thanks to capacity cuts and the recent plunge in oil prices. But the fast drop below $90 a barrel, now sliding toward $80, could be a bearish sign for the broader economy. Typically this is indicative of less demand, consumers pulling back, and travel-related stocks should feel the pain.
But so far this hasn't been the case in Najarian's view. He says the oil price slide is benefiting stocks like TripAdvisor (TRIP) and Expedia (EXPE) as consumers jump on the opportunity to take cheaper vacations. Including today's ugly price action, TRIP is up 60% year-to-date, and Expedia up 52%.
When asked to pick his favorite airline as a weak oil play, Najarian says it's Delta all the way.
"I think Delta continues to win here because they've got great exposure all over the U.S., and the consolidation of Northwest Airlines," he explains. "And let's not forget they also, with the backing of JP Morgan (JPM), bought a refinery."
While it's a questionable move, and Najarian admits they got laughed at, it may just prove to be the next great hedge if crude oil bottoms out soon, and heads back up north as it always does.