Westjet Airlines (WJA.TO)

(Market Call Minute.) A pretty interesting company with the dynamics lately with Albertans and its economy. Feels airline stocks are too cyclical for his type of investors. If he were going to own one, this is definitely one he would look at.

(A Top Pick Nov 24/15. Down 7.28%.) Short. (A pairs trade with a Long on Allegiant Travel (ALGT-Q).)

He really likes it. He sees a 16% return on capital. It looks relatively cheap.

In general, he is fairly constructive on airlines. Energy prices are coming down and interest rates are at low levels. With this airline, you are getting a lot of noise of what is happening in Alberta, which has been a hurdle for them. As cycles go, this one offers a good product. The environment is right and the economy is right, so overall that growth should continue. You could wait and buy it opportunistically on bad headline news.

(Market Call Minute) They don’t meet his ROE criteria. There are better alternatives.

This has a cloud with the Alberta weakness, which is the opportunity. It has gotten too cheap based on that. Trading at 3.7X EBITDA, 9X PE and recently beat. Pristine balance sheet. This has really one of the best margins and ROI in the business. Dividend yield of 2.47%.

(A Top Pick April 22/15. Up.) Short (and Long Allegiant Travel Company.) This Pair trade was really driven on the short side by WestJet because of a lot of headwinds they face with Alberta. The weaker loonie makes it tougher for them to buy jet fuel. Thinks the outlook for 2016 is not that bright.

This airline faces 3 challenges in the near future. 1.) They have to deal with allegations of sexual misconduct. 2.) They are facing a union challenge. 3.) They have a new low cost competitor. Low fuel prices have been a tremendous boon to airlines, and this airline, along with Air Canada (AC-T) have been very good at managing their load factors. He has taken a vow of not owning any airline stocks.

(Market Call Minute.) With low energy prices and increased tourism, this is one that can do well.

WJA-T vs. AAL-Q. On AAL-Q, the industry has consolidated so the airlines have pricing power. 10 years ago all these airlines were losing money. There are ultra low cost carriers coming in and undercutting the others and there is a bit of a price war going on. This is not happening in Canada. He would stay out of the US. WJA-T is safer than AC-T.

Their hub is the Calgary, Edmonton, Vancouver routes. Obviously with the recession in Calgary, she doesn’t think the company can do well. Have reduced the number of flights in Alberta and moved them to eastern parts of Canada. They are doing whatever they can, but the reality is that there is only so much they can do.

Doesn’t own any airline stocks as it is very cyclical. You couldn’t ask for a better management team or a better quality company, if you’ve got a long-term time horizon. However, there are recession risks in Canada and concerns about capacity and pricing. A lot of those things are being reflected in the valuation. If oil prices go up and economic fundamentals stabilize, there should be some firmness and pricing which should prop up the stock and the valuation. This is a good entry point. Dividend yield of 3.6%.

On a chart going back to 2012, there was a pretty nice upward trend line, and that broke down in early 2015, and pretty aggressively. Since then there have been multiple breaks of support. There was a level of support at around $24 that was tested recently, but it broke. At this point it took out another low from the summer. You are possibly going to find a bounce here, but he would want to see it bounce off the $16.50-$17 level and hold before he got involved.

Don’t buy more right now because the industry has come under pressure. He prefers AC-T with less exposure to western Canada. It comes down to your view of what is happening in Western Canada.

From a Relative Strength technical standpoint, it doesn’t look very healthy. Feels a lot of that has to do with the Canadian economy and that they are out west with the majority of their business. At this point in the cycle, you probably don’t want to own this.