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Growth Stocks

Up in the Air

By Elliott H. Gue, on Jan. 31, 2014

Based on past performance, airline stocks deserve their reputation as terrible investments.

The US airline industry has the dubious distinction of losing more money in 2002 than it made in cumulative profits since deregulation in 1978.

And all three of the major full-service carriers operating today–American Airlines Group (NSDQ: AAL), Delta Air Lines (NYSE: DAL) and United Continental Holdings (NYSE: UAL)–have declared bankruptcy at least once.

Many well-respected airline operators have also folded over the past few years, undone by burdensome cost structures and cutthroat competition. The airline graveyard includes former highfliers Eastern Air Lines, Pan American World Airways and Trans World Airlines.

However, investors shouldn’t overlook fundamental changes in the airline industry that have transformed these perennial losers into big winners.

Nevertheless, we foresee additional upside for shares of our favorite US air carriers. The New York Stock Exchange ARCA Airlines Index trades at about 10 times forward earnings estimates; this multiple could expand to between 13 and 15 times 2014 consensus earnings expectations, thanks to improving profitability, rising dividends and a wave of stock buybacks.

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