M2 BARRON’S February 15, 2021
cern that maybe, just maybe, there may be
too much stimulus coming down the pike.
Details of a possible $1.9 trillion package are
still being worked out, but President Joe
Biden has already held a meeting with sena-
tors to discuss an infrastructure plan, which
could add an additional trillion or more.
That has created concerns over higher taxes
to pay for the plan, as well as even higher
yields, to reflect the possibility of stronger
growth—and what they would mean for a
market that’s already showing signs of froth.
“The biggest concern for stocks was
higher taxes/regulation followed by infla-
tion/higher rates, though the duration and
severity of the pandemic remained a signifi-
cant focus,” Evercore ISI’s Oscar Sloterbeck
wrote about the firm’s survey of investors.
For now, the steady gains in bond yields
have been good for the market, according to
Ned Davis Research strategist Tim Hayes.
He notes that the correlation between the
yield on the Barclays Global Aggregate Bond
index and global stocks currently sits at
0.24—a correlation of 1 means two assets
move in lockstep—and has been fairly steady
since the market stabilized after the corona-
virus meltdown. If the correlation turns neg-
ative, which would mean that stocks and
bonds move in opposite directions, it could
be bad news for equities.
“If the correlation would return to inver-
sion, it would tell us that the markets had
started to view rising yields as a threat to
economic growth, and in turn corporate
profits,” Hayes writes.
For now, though, we’ll continue to enjoy
the gifts that keep on giving.
Airlines Will Survive Turbulence
For much of the financial markets, it’s al-
most as if Covid-19 never happened.
It’s not just that Dow Jones Industrial
Average is up 6.8% over the past year,
when the market peaked before the
Covid-19 selloff. This past week, we learned
that fourth-quarter earnings from S&P 500
companies look set to surpass those from
2019, a sign that—for big companies, at
least—the round trip has been made.
Airline stocks remain a notable excep-
tion. TheU.S. Global JetsETF (JETS) is
down 26% over the past year, as airlines
continue to struggle with the impact of
Covid. Air traffic remains muted, and pas-
sengers who might have been looking to fly
in the spring are changing their plans. A
quick check ofExpedia Group(EXPE)—
whose stock rose 3.6% this past week de-
spite disappointing earnings—found a
round-tripAmerican Airlines Group
(AAL) flight to Orlando, Fla., from New
York in early April costs just $89.
There’s reason for optimism, however,
because prices are rising further later in the
year, explains DataTrek co-founder Nicholas
Colas. A similar flight onJetBlue Airways
(JBLU) at the beginning of July costs twice
that amount. And over Christmas?Delta
Air Lines(DAL) is charging $349.
“US airlines are seeing increasing pricing
power throughout 2021,” writes Colas, who
conducted the price search. “Even if these
costs are getting skewed by airlines manu-
ally setting higher prices in the back half of
this year with the expectation of widespread
inoculation, it still signals industry confi-
dence about pent-up demand for travel.”
Investors who want to play the sector can,
of course, simply buy the Jets ETF, which
owns everything from American, Delta,
United Airlines Holdings(UAL), and
Southwest Airlines(LUV) toAzul(AZUL)
andFlughafenZürich(FHZN.Switzer-
land). The ETF has gained 7% during the
past month despite talks of mandatory Covid
testing before flights, disappointing earnings
reports, and no real visibility on when—or
if—flying will return to normal.
Or they can take a more selective ap-
proach. While everyone appears to agree
about what will happen—consumer travel
will come back quickly, business travel not
so much—airline valuations are all over the
Vital Signs
Friday's Week's Week's
Close Change % Chg.DJ Industrials 31458.40 +310.16 +1.00DJ Transportation 13175.09 +386.58 +3.02DJ Utilities 857.10 -15.15 -1.74DJ 65 Stocks 10404.83 +117.33 +1.14DJ US Market 1000.82 +14.70 +1.49NYSE Comp. 15369.60 +300.00 +1.99NYSE Amer Comp. 2624.49 +94.67 +3.74S&P 500 3934.83 +48.00 +1.23S&P MidCap 2544.55 +67.88 +2.74S&P SmallCap 1297.90 +45.15 +3.60Nasdaq 14095.47 +239.18 +1.73Value Line (arith.) 8848.59 +238.12 +2.77Russell 2000 2289.36 +56.03 +2.51DJ US TSM Float 41733.23 +659.23 +1.60LastWeek WeekEarlierNYSEAdvances 2,117 2,845Declines 1,171 459Unchanged 60 30New Highs 758 492New Lows 27 26Av Daily Vol (mil) 4,593.5 5,102.4Dollar(Finex spot index) 90.45 91.04T-Bond(CBT nearby futures) 166-050 166-230CrudeOil(NYM light sweet crude) 59.47 56.85Inflation KR-CRB(Futures Price Index) 185.29 181.39Gold(CMX nearby futures) 1821.60 1810.90Starting at $0 Commissions
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February 15, 2021 BARRON’S M3
place. That’s partly due to differences in the
amounts of money raised by companies in
both debt and equity offerings. “There’s not
a sector call to make on airlines,” McCourt
says. “It’s very stock-specific.”
He points to his firm’s Strong Buy- and
Outperform-rated airlines as the best way to
play a post-Covid rebound, including
Alaska Air Group(ALK), which needs to
gain 25% to return to pre-Covid price levels,
SkyWest(SKYW), which also needs to gain
25%, and United, which needs to gain 28%.
Alaska looks particularly interesting. The
company reported earnings on Jan. 26—a
loss of $2.55 a share, beating forecasts for
$2.87, on sales of $808 million, missing esti-
mates for $824.77 million—and the stock
tested $49, the bottom of its recent range.
Since then, it has rallied 18% and looks
ready to break out. Raymond James points
to Alaska’s “low-cost/capital-efficient DNA,
largely domestic focus, and relatively unim-
paired balance sheet.”
It just might be time to take a flier.
Coty’s Stock Tumbled. Time to Buy.
It’s not every day a company slumps after
releasing earnings and Wall Street walks
away more confident than before. That
seems to be the case withCoty(COTY).
It hasn’t had an easy time of late. The
parent company of Cover Girl, Kylie, Max
Factor, and other well-known beauty brands
has had too much debt, too little growth, and
too many CEOs since the start of 2020. The
Covid-19 pandemic hit its consumer brands
hard, and the stock, down 38% last year,
was removed from the S&P 500. Still, things
appeared to be turning a corner under CEO
Sue Nabi, who took over in September, help-
ing Coty rally 88% since the end of August.
Then it reported second-quarter earnings.
They weren’t so terrible: a profit of 17 cents a
share, beating analyst forecasts for seven
cents, though sales of $1.42 billion were a
touch light compared with the $1.43 billion
consensus. Yet the stock plunged 15% on
Tuesday, the day results were released, be-
fore closing the week down 11% at $6.78.
What caused the meltdown? Some of it
was surely high expectations—Coty stock
had gained 25% in the six days before the
release. But there was more than that, ex-
plains Citigroup analyst Wendy Nicholson,
who rates the stock a Buy.
Sales from the Kylie brand—Coty paid
$600 million for a 51% stake in the company
last year—flatlined. Like-for-like sales
growth, which Nicholson expects to grow by
4% in Coty’s fiscal third quarter, is sluggish,
especially compared with competitors like
Estée Lauder(EL) andInter Parfums
(IPAR). Guidance for $750 million in sec-
ond-half earnings before interest, taxes, de-
preciation, and amortization “might have
looked light to some,” Nicholson says.
Still, she remains optimistic about Coty’s
prospects. “We view the share price weak-
ness following today’s print as an attractive
buying opportunity and reiterate our Buy
rating,” Nicholson wrote after the results.
Even better, Evercore ISI analyst Robert
Ottenstein upgraded Coty shares to Outper-
form from In Line. He cited accelerating
growth in its fragrances division, which
makes up more than 50% of sales, and
growth in online, which now makes up 19%
of sales and is closing the gap with Estée
Lauder, which gets a quarter of its sales from
the web. Ottenstein also cited continued
growth in China and the company’s plans to
cut costs by $300 million in 2021.
But the upgrade really came down to one
thing: an upgrade in management. Writes
Ottenstein, who put a $10 price target on
the stock, up more than 40% from Friday’s
$6.78 close, “CEO Sue Nabi...has quickly
attracted high quality talent to unlock the
value trapped in Coty’s brands.”
And perhaps in the stock, too.B
Industry Action
Performance of the Dow Jones U.S. Industrials, ranked by weekly percent change.*
Oil & Gas 4.32%
Industrials 2.69
Technology 2.21
Financials 1.78
Health Care 1.54
Basic Materials 0.70
Consumer Services 0.39
–0.59 Consumer Goods
–1.28 Telecommunications
–1.60 Utilities
- For breakdown see page M32. Source: S&P Dow Jones Indices
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