Republic Airways Reader Comments
As investors, we need to keep an eye on the macro-economic picture since we know the performance of most companies tends to follow broad trends. The occasional exceptions are massive multi-national companies like Wal-Mart (NYSE: WMT) which regularly posts annual sales greater then the economies of 140 countries, according to the International Monetary Fund.
With this big picture view in mind let's take a quick look at what's making news today. Trading in foreign markets was mixed for the second day in a row. Asia indices were mostly higher, but Japanese, Australian, and European indices are all lower. U.S. stocks have also been trading sideways for most of the morning in a continuation of yesterday's market movement.
Yesterday small-cap trading followed the broad trend as the iShares Russell 2000 Index (NYSE: IWM) lost a quarter percentage point to close at $63.10 and the iShares SmallCap 600 (NYSE: IJR) closed flat. What does this all tell us? The market was taking a breather after a nice move higher over the last two weeks when the Russell 2000 small-cap index rose 6.4%. And it's paying attention to news again. That's a good thing; it shows that investors are not getting complacent.
This morning at 9:00 housing price information was released. The Standard & Poor's/Case-Shiller 20-city home price index rose 0.3% from November to December, not a huge move higher but an important baby step for our fledgling economic recovery. We've discussed in Small Cap Investor Daily how a recovery in the housing market here in the U.S. is absolutely necessary for a sustained recovery, and this is a good opportunity to reiterate the point. In fact, a bleak housing market and high unemployment are the two major drags on our economy at the moment, so any positive developments on these fronts should help support investor confidence in an economic recovery.
Unfortunately, any positive feelings from the home price data release were swept under the rug at 10:00 today when the Michigan consumer numbers were released showing a drop in the consumer confidence index, from 56.5 last month to 46 in February. A reading of 90 typically signals a healthy economy, and the latest data even fell short of an already poor analyst expectation of 55.
The bottom line for investors is to continue to expect volatility, and no clear trend. The market continues to react to news and will do so for the foreseeable future. However, there is always opportunity out there for small-cap investors so let's get back to individual stocks.
***I received a number of positive comments after yesterday's issue of Small Cap Investor Daily, Picking up Airline Stocks on the Cheap. In yesterday’s issue, I reviewed Republic Airways (NYSE: RJET), a beaten down airline stock that Patricio sent in. I really enjoy reviewing the companies you send in and getting a back-and-forth dialogue flowing on particular investment ideas. So I'm going to post a few comments to follow up on yesterday's issue.
Yaodi wrote: "I really enjoyed reading your article on RJET. You laid out all the reasons why RJET is selling cheap. In recent quarter ending 09/30/2009, RJET Selling, General and Administrative Expenses jumped by [500%]. How did the company explain that? The gross margin went down a bit, but largely stable. With major airlines as their customers, I don't see how RJET could lose money unless there is competitor out there pressuring their gross margin.
With Price/tangible Book ratio at 0.5, RJET could easily be a hostile take over target. With major airlines as its customers, RJET could easily pass the cost increase to its customers. Why RJET could not be a long term investment? To me, it is both excellent and best candidate in airline industry for both long term investment and short term speculation."
There are two things that jump out at me from Yaodi's comments. The first is that this reader is doing independent research. This is an absolutely critical step for independent investors, so two thumbs up for Yaodi! Keep in mind I'm reviewing these stocks rather quickly, so I don't have time to do as thorough of an analysis as I would if recommending a stock to subscribers of Small Cap Investor PRO.
The second thing that jumps out is the question regarding short-term versus long-term investing. My answer is to reiterate what I wrote yesterday, ' I wouldn't buy shares and forget about them for the next five years…" I'm not trying to say that five years from now Republic Airways' stock won't be higher then it is now. I'm simply stating this is a stock you want to keep your eye on since it is a speculative investment. In contrast, Lancaster Colony (NYSE: LANC), another stock we've been following, is in my opinion a much safer small-cap investment. But it most likely doesn't have the same upside potential (or risk) as Republic Airways.
Harold also commented, he writes: "...I work for an airline. I can tell you this company is going to acquire some routes from [another airline] this summer from Chicago O'Hare International Airport. [This] means there is a potential for growth there as you have mentioned.
Harold seems to be keeping an ear to the ground, and is watching the growth side of the equation (versus the debt management side). I haven't checked to substantiate his claims, but as I wrote yesterday anybody researching this stock should pay attention to route and hub expansions. They indicate potential growth opportunities, or can signal contraction of services.
I'm still reviewing the requests that came in over the weekend and will cover another stock this week. Keep up the good work and keep sending me tickers of companies you like. I'll review them in a future issue. My address is: editorial@smallcapinvestor.com
