While those names could sound tempting for investors who may think they are cheap, BusinessWeek's Karyn McCormack reminds us that not everything that is cheap is a good bargain, and there are some risks that need to be taken into account.
One common problem for most of these stocks is that they trade under $10 for a reason. That reason is usually hardly any earnings growth, if any at all. And with a weak economy, these companies would have an even harder time to stimulate growth. Add to the mix the fact that institutional investors don't like to touch stocks under $10 and the potential for recovery is not good.
As Lehman Brothers Holdings Inc (NYSE: LEH) is about to report a second quarter loss of about $2B, the firm is closing in on raising over $5B in new capital, the Wall Street Journal reported. Once source of Lehman's new funding is reportedly the New Jersey Division of Investment.
The Financial Times reported that General Electric Company's (NYSE: GE) NBC Universal and British private equity firm GMT Communications Partners are expected to soon acquire Bigpoint, a German-based computer games website.
OTHER PAPERS:
According to the Independent, the credit crunch has cost the jobs of about 100 bankers at Barclays Plc (NYSE: BCS). The bank cut about 20 individuals on the leveraged finance team and will reportedly cut 80 more in investment banking and IT support.
A man traveling on an employee buddy pass (and thus presumably flying for free) was ordered to sit in the bathroom of a packed JetBlue Airways Corporation (NASDAQ: JBLU) flight. He is now suing the company for $2 million.
Gokhan Mutlu claims that the pilot of a JetBlue flight from New York City to San Diego ordered him to sit in the bathroom after a flight attendant claimed his seat. The attendant apparently felt that her jump seat was uncomfortable; since Mutlu was not an employee, he couldn't sit in her jump seat. And on a full plane, that left the toilet as the only seating option on the five hour flight.
Mutlu wasn't crazy about the idea, but the pilot soon set him straight. According to the lawsuit, the pilot said that "he was the pilot, that this was his plane, under his command that (Mutlu) should be grateful for being on board." So the bathroom it was. Eventually, Mutlu was allowed to return to his original seat.
Whatever really happened, JetBlue can't afford any more bad press. The airline is still trying to make customers forget about trapping passengers on their planes for up to nine hours during bad weather last year.
On the other hand, maybe this isn't such bad news. It might just show that JetBlue pilots have a wicked sense of humor. Given the crowds expected on planes and runways this coming summer, that could be a good thing. JetBlue could even build an ad campaign around it: JetBlue - there's always an extra seat!
After hitting a one-year high of $11.99 in July, the stock hit a one-year low of $4.30 in January. JBLU opened this morning at $5.10. So far today the stock has hit a low of $4.50 and a high of $5.11. As of 12:40, JBLU is trading at $4.57, down $0.36 (-7.3%). The chart for JBLUlooks neutral and deteriorating, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a December covered call at the $5 level. A covered call is an options position that combines the purchase of stock with the sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 34.4% return in eight months if JBLU is above $5 at December expiration. JetBlue would have to fall by more than 18% before we would start to lose money. Learn more about this type of trade here.
Analysts surveyed by Thomson Financial expect Southwest Airlines Co. (NYSE: LUV) and Pfizer Inc. (NYSE: PFE) to post smaller profits in the first quarter. Both companies are scheduled to report results on Wednesday.
Southwest is expected to essentially break even as far as earnings are concerned, which is down from the same period in 2007 when it earned four cents per share. The company has beat quarterly estimates recently. It only just beat the consensus third-quarter 2007 estimate, but beat the fourth-quarter estimate by 21.2%.
Dallas-based Southwest's low-cost, no-frills approach has made it one of the leading U.S. airlines. In the past year, the company's revenues were $9.8 billion and its net income totaled $645 million. Its EPS growth forecast for the year is -28.7%, worse than the industry average but better than that of rival JetBlue Airways (NASDAQ: JBLU). The consensus recommendation of analysts remains to buy Southwest.
The stock has fallen 18.5% in the past year and trades at a P/E of 14.7. Shares closed Tuesday at $12.35.
I have had some clients ask me, what industry I think will benefit from the $600 rebate checks that are due to be sent out as part of the U.S. economic stimulus package. I think airlines will benefit, especially lower cost carriers like Southwest (NYSE: LUV) and Jet Blue (NASDAQ: JBLU).
The USA Today has an article about the kind of vacation you can have for $600. The article says: "With most Americans expecting to receive a tax rebate of up to $600 ($1,200 for married couples), there are plenty of ways to get the most vacation for your buck, say travel experts. Whether it's a cruise, a tropical paradise, or family travel, these trips can all be done for under $600 a person."
Because we aren't talking about flying around the world or across the Atlantic for that measure, trips to Las Vegas or Orlando, for example, will fit the family, and of course people need a way to get to these destinations, so that's how the airlines become interesting. Throw into the mix potentially stable or even lower fuel costs, and for investors looking for a way to play the "Rebate check" game, you may want to take a look at the airlines.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/2/08
Ruling that it's not in their jurisdiction an appeals court rejected a New York state law that would have required airlines to provide food, clean toilets, water, and fresh air to passengers stranded on a plane that's been delayed. The NY law came in response to last winter's fiasco at JFK airport when multiple airlines, most notably JetBlue Airways Corporation (NASDAQ:JBLU) were stuck on the runway for 10 hours and passengers had no food, or clean toilets.
According to an AP report: "The court said that while the goals of the law were "laudable" and the circumstances prompting its adoption "deplorable," only the federal government has the authority to pass such regulations.
"If New York's view regarding the scope of its regulatory authority carried the day, another state could be free to enact a law prohibiting the service of soda on flights departing from its airports, while another could require allergen-free food options on its outbound flights, unraveling the centralized federal framework for air travel," the court wrote.
JetBlue Airways Corporation (NASDAQ: JBLU) shares are rising today even after analysts at UBS and Lehman Brothers have reduced earnings estimates and downgraded some of JBLU's competitors this morning, including UAL Corp. (NASDAQ: UAUA) and US Airways (NYSE: LCC), on record fuel costs and recession worries. JBLU shares are moving higher as oil prices have fallen below $100 a barrel on data suggesting lower demand for fuel in a weakening U.S. economy. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on JBLU.
After hitting a one-year high of $12.32 last March, the stock hit a one-year low of $4.30 in January. JBLU opened this morning at $5.23. So far today the stock has hit a low of $5.00 and a high of $5.47. As of 12:15, JBLU is trading at $5.46, up 46 cents (9.2%). The chart for JBLU looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a September covered call at the $5 level. A covered call is a combination option and stock position that combines the purchase of stock with the sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 22.4% return in just six months if JBLU is above $5 at expiration in September. JetBlue would have to fall by more than 24% before we would start to lose money on this trade.
JBLU hasn't been below $4, which would be the break-even point, at all in the past year and has shown support around $4.50 recently. This trade could be risky if the price of fuel, but even if that happens, this position could be protected by the support the stock might find just below $5, where the stock has bounced twice in the past few months.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in JBLU.
Sometimes in a period of uncertainty, a look back can provide some perspective. So here are a few highlights from BloggingStocks on March 16, 2007,a year ago today.
JetBlue reported a narrower-than-expected loss in the fourth quarter, and its first full-year profit in three years. It also announced that it's negotiating a deal with investor Deutsche Lufthansa AG.
JetBlue lost $4 million, or 2 cents a share, in the quarter ending December 31. It posted a profit of $17 million, or 10 cents a share, in the same quarter of 2006. An increase in traffic and operational improvements helped offset rising fuel costs. Revenue rose 16.6% to $739 million. Analysts surveyed by Thomson Financial had expected a loss of 5 cents a share on revenue of $731 million.
For the full year, JetBlue earned $18 million, or 10 cents a share, versus a loss of $1 million, break-even on a per-share basis, in 2006. Revenue jumped 20.2 percent to $2.84 billion. Wall Street had expected a 2007 profit of 7 cents per share on revenue of $2.83 billion.
Shares surged 20.24%, or $1.00, to close at $5.94. Shares had fallen to a 52-week low of $4.30 last week.
BloggingStocks readers and AOL Money & Finance visitors have spoken, and below are the Best & Worst of 2007. (See the individual posts for full results.)
Company of the Year:Google, internet search provider turned diversified services giant, received 51% of the vote, beating such strong contenders as Apple and Coca-Cola.
Hottest Gadget of the Year: After all the hoopla surrounding the launch of the iPhone, it's no big surprise that it tops this category, with 47% of the vote, besting second place finisher the Nintendo Wii.
Germany-based Lufthansa's announcement late Thursday that it would buy a 19% stake in JetBlue (NASDAQ: JBLU) could lead to other airline deals, as industry players seek both economies of scale and greater international reach, according to one analyst familiar with the sector. The Lufthansa-JetBlue deal requires the approval of U.S. federal regulators.
"This could be the deal that gets the airs [airlines] in merger-mode again," analyst C. Leonard Bauer told BloggingStocks on Thursday.
Under U.S. law, no foreign airline can own more than 25% of a U.S. airline, and there are other restrictions that limit the foreign company's influence.
Lufthansa announced Thursday it would pay $7.27 per share for 42 million new JBLU shares, or about $300 million. That amounts to a 19% stake at Thursday's closing price, the airlines said in a joint statement Thursday. Lufthansa will also receive a seat on JetBlue's board.
Improved sector conditions
Bauer said three factors had reduced merger and acquisition talk among the airlines for several years: sub-par sector cash flow, better merger/acquisition and partnership opportunities in other sectors, and regulation.
"For the longest time, U.S. airlines were not that attractive, particularly the weaker ones, but now cash flow has improved, the sector's growth prospects are adequate and the new 'open skies' rule will mean more competition across the Atlantic, so airlines have to be ready," Bauer said. "An airline could suddenly find itself vulnerable in a previously light-competition market, so they need to be ready to partner, or to merge or buy an airline for access to new markets."
Under the "open skies" agreement, a slow deregulation of flight routes and markets between the United States and the European Union will begin in April 2008.
"The last thing a major carrier in the United States or Europe wants, for that matter, is to wake up one day and find that your market has been penetrated, and you don't have comparable positions in some of those open skies markets," Bauer said.
For the first nine months of 2007, Lufthansa reported earnings of $2.33 billion, or 1.60 billion euros, and revenue of $23.9 billion, or 16.4 billion euros.
MOST NOTEWORTHY: U.S. refiners, Rigel Pharma and JetBlue were today's noteworthy upgrades:
Goldman upgraded the U.S. Refiners to Attractive from Neutral, citing valuations; the firm raised its rating on CVR Energy (NYSE:CVI) and Holly Corp (NYSE:HOC) to Buy from Neutral.
Lehman upgraded shares of Rigel Pharma (NASDAQ:RIGL) to Overweight from Equal Weight following the company's positive R788 data.
Bear Stearns said the Lufthansa (DLAKY) investment gives JetBlue (NASDAQ:JBLU) some breathing room to execute on its turnaround but notes the company's long-term strategy remains in question. Bear raised its rating on JetBlue to Peer Perform from Underperform.
OTHER UPGRADES:
UBS upgraded Disney (NYSE:DIS) to Buy from Neutral.
Wachovia upgraded Jack in the Box (NYSE:JBX) to Outperform from Market Perform.
The weak market conditions have caused many stock prices to fall under $10. Not only smaller -- and perhaps lesser known -- stocks trade under $10 these days, but also some big and famous names such as Ford Motor Co. (NYSE: F), Motorola Inc. (NYSE: MOT), Sprint Nextel Corp. (NYSE: S), Washington Mutual Inc. (NYSE: WM) and Del Monte Foods (NYSE: DLM), as well as many airline companies like Northwest Airlines (NYSE: NWA) and JetBlue (NASDAQ: JBLU). .gif){kind=logo}
Well, at least the seat was free. 
Here are some highlights from this past week's 
Analysts surveyed by Thomson Financial expect 
Germany-based Lufthansa's announcement late Thursday that it would buy a 19% stake in .gif){kind=logo}
The week in preview: New quarter earnings kick-off
Comfort Zone Investing: Keep your recovery expectations real
Will Americans have to slim down to fit into their cars?
