SkyWest Inc. Best Near-Term Airline Buy (NASDAQ:SKYW)

Investment Thesis

Time is an essential element in any stock investment, sometimes of a controlling nature for investors needing to meet recognized financial needs. But rate of wealth-building is always important, especially in attempting to reach longer term goals.

The Airline Industry, and SkyWest Inc. (SKYW) role in it is a valid example. No one yet can be sure of a transport traffic schedules because of the compounding of a health overlay on failure tragedies of equipment (BA x737) in widespread use.

SA contributor John Gilluly has done a craftsman job of industry fundamentals in seekingalpha.com/article/4381729, and it deserves a comparable treatment of near-term prospective price estimation.

That is beyond my resources directly, but I can determine what knowledgeable, interested and involved investment professionals appear to be convinced may be ahead, based on the chances they are willing to take and what they will do to protect themselves.

A Brief Background

Equity investment markets in developed world economies now have a two-fold nature, one which began in the 3rd quarter of the 20th century as 1) market-making partnerships found the competitive need to become publicly-owned equities themselves and 2) as data management by electronic devices advanced, so did evaluation practices.

The advancing economics of record-keeping forced the automated systematization of small-volume/value trades. That finally reached the point where now, at the start of the third decade of this 21st century, costs are so minimized that transactions which can be forced into standardized treatment are being conducted without trade “commissions”.

But that can’t work for “institutions” running multi-billion-dollar equity portfolios. They need to move volumes of shares held (or desired to be held) in magnitudes beyond what are regularly posted as “open offers” or bids. So, these trades must be negotiated between big participants, often in groups. Most of the time, incomplete efforts between buyers and sellers to reach a supply-demand balance require the MM to make up the difference.

Nearly all players in this serious “game” are anticipators, and knowledge of the degree of intent among the participants has important potential price impact in itself. So, market-makers who will maintain the anonymity of their clients are important. It is as essential as conserving the time it takes to assemble the “other side of the trade” to meet the clients’ desires.

Thus, the market-maker [MM] typically is drawn into the trade as a principal, a part-owner of the transaction’s imbalance, rather than merely as an agent introducing buyer and seller to act between themselves.

That won’t be done without price-change protection insurance for the MM, paid for by the client, as part of the “liquidity cost” of the transaction. Such protection is provided for by hedging deals in “derivatives” markets where legal contracts involving price and time constraints provide economic leverages.

The hedges provide forecasts of price extremes as seen by hedge buyers and sellers, and the trade-ordering client. This is what makes their forecasts so valuable. Instead of aiming at some single-point price target to be hoped for, we now have a sense of what are likely limits of price movement, within reasonable future periods of time. When desired upside price objectives are approached, the investor has a sense of both the remaining potential payoff and the building risk of price drawdown loss

Price Forecasts

We monitor and evaluate the effectiveness of these forecasts daily on over 4,000 equity securities, including ETFs. Over 1,000 of them are worthless and get ignored. But several hundred of them have relevant histories which make them useful in selecting among timely investment alternatives. Figure 1 shows the current RISK~REWARD tradeoffs between over a dozen airline stocks and ETFs, as seen by the market-making community in response to the volume block-trade orders of their “institutional” clients adjusting positions in multi-billion$ portfolios.

Figure 1

Upside price rewards come from the behavioral analysis (of what to do right, not of errors) by Market-Makers [MMs] as they protect their at-risk capital from possible damaging short-position future price moves. Figure 1’s potential reward (best upside likely price change) forecasts are measured by the green horizontal scale.

The investor’s risk dimension is of actual-experience price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. They are measured on the red vertical scale.

Both scales are of percent change from zero to 25%. Any stock or ETF whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line.

Best reward-to-risk tradeoffs are to be found on this map at the frontier of alternatives, down and to the right. In this case the S&P500 index ETF (SPY) at [5] and U.S. Global Jets ETF (JETS) at [13] currently form that frontier. Our special interest is in SKYW at location [8].

SKYW Description

SkyWest, Inc., through its subsidiaries, operates a regional airline in the United States. The company operates through two segment, SkyWest Airlines and SkyWest Leasing. It also engages into leasing aircraft and spare engines to third parties. As of December 31, 2019, the company provided scheduled passenger and air freight services with approximately 2,300 total daily departures to various destinations in the United States, Canada, Mexico, and provides airport customer and ground handling services for other airlines throughout its system. SkyWest, Inc. was founded in 1972 and is headquartered in St. George, Utah.”

Source: Yahoo Finance

The Figure 1 map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor’s choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others.

Figure 2

Source: Author

Figure 2 presents the MMs’ price range forecasts for our principal-interest investment candidate and their competitor alternatives, along with the histories of outcomes from the prior forecasts having the same proportions of upside-to-downside prospects as today’s.

This table presents data on those stocks most likely to produce satisfying RATES of capital gain under the portfolio management discipline known as TERMD, explained by article How To Better-Than-Double Your Capital Gains (From Stocks Alone) By Using TERMD Portfolio Discipline in my SA blog.

That discipline seeks the largest, most likely, quickest to be captured net capital gains with the least interim exposure to price drawdown on the way to target reward attainment. For comparison to SKYW it is applied in Figure 2 to the blue rows of market index ETF (SPY), our MM-forecast today population 2985-securities aggregate, and its top-ranked 20 stocks.

The gains and risks of Figure 2 are in columns of [E] and [F]. SPYW’s +12.8% upside prospect from [D] $29.72 to [B] $33.51 compares with SPY’s upside potential of +11.3%. The risk exposures data of [F] draw from prior experiences rather than from current forecasts. Indeed, market circumstances often make current price risk forecasts an underestimation of what may ultimately occur. They may be more beneficial to the sellers of insurance than to the buyers.

But instead, the [F] data is an average of the worst instance of actual interim price drawdown below the position’s entry cost in each of the prior [L] forecasts like [G] during the [J] days the position was held. It measures the true price risks actually encountered as a result of the relevant forecasts, not just of some prior calendar historic extreme.

The “proof” of the coming-price “pudding” is suggested by what proportion of those [L] forecast outcomes wound up at a profit – shown as a % of 100 in [H]. This important dimension is used to weight the actual [ I ] payoffs realized as a ranking figure of merit (fom) when teamed up with a similar offset of [F] weighted by the complement of [H], or 100-H. That action takes place in [O] and [P] when combined in [Q].

While [Q] suggests a sense of scale, its calibration by the TIME required in [J] converts the scale into speed in [R]. The speed is stated in conventional financial-industry terms of “basis points per day” or bp/d. A basis point is 1/100ths of a percent, and in a calendar year of 365 days 19 bp/d sustained for a year doubles the capital invested. On the 252-day market year it takes 27.5 bp/md.

Figure 2’s column [R] provides an inclusive “figure of merit” (fom) useful for preference-ranking of securities where capital-building is of importance in future expectations. The foms show how different are the prospects for SKYW compared to SPY, the SPDR S&P500 Index TRUST ETF (SPY) as a market-proxy.

SKYW’s bp/md of 12.7 is equal to more than a CAGR of +61%, and SPY’s 8.1 bp/md produces a CAGR of 27% where the AGR of CAGR is an annual growth rate of 252 market days.

When price-range forecasts from qualified appraisers are available on a large population of equity securities, as they are in our population of over 2900 MM forecasts, a further notion of opportunity norms is available. Many past-history “norms” of indexes like SPY exist, but very few are selective averages of forecasts like the +18.8% upside and -10.6% downside of this population.

The principal limitation of our broad market expectations measure is that its forecast horizon is limited to the legal lives of the derivative contracts used to imply the range of coming prices. That horizon typically is limited to a few months. The TERMD risk-management discipline referred to earlier sets a time-investment cut-off at 3 months.

The figure of merit [R] ranking has a multi-year daily history of capital-gain (and loss) outcomes for the best odds-on outlooks in the MM forecast population. The top20 bottom blue-row of Figure 3 provides an appropriate contrast with the row-above population.

The top20 now shows an upside price-change prospect of some +17.1% gain potential, less than the population’s +19%. But its price-change risk outlook is so much lower: only -7.1% compared to -10.6%. The payoff advantage appears in [ I ] where gains of +14.7% have been achieved from top20 prior forecasts, compared to the populations’ mere +4.4% and SPY’s +5.7%.

Higher-risk experiences are the population culprit. Only 6 out of every 10 population forecasts have been [H] winners (profitable under TERMD discipline) compared to 7 out of every 8 of the top20’s. Time investments also “contribute” to he population’s worst losses, turning an overall average gain into a fom net loss, the negative of that had by SPY.

The top20’s smaller time investment of 31-day holding periods boosts its bp/d fom score. Compounding time-investment efficiency with realized payoffs is very powerful, producing triple-digit CAGRS quite frequently.

What has been SKYW’s recent past forecasts trend?

Figure 3

(used with permission)

The vertical bars of Figure 3 plot the MM-community hedging forecast price ranges, with a heavy dot at the market’s quote on the date of the forecast. It splits the range into upside and downside coming price change prospects.

An upward trend of recent months’ price expectations is encouraging and supports the current forecast. The most recent day price drop carried SKYW’s forecast lower along with it.

The small lower picture of Figure 4 is the past 5 years’ distribution of daily Range Indexes. Clearly higher market prices will need the support of higher Market-Maker price-range forecasts. The current RI of 54 is already in the upper tail of the distribution and is not suggestive of ready upward valuation.

Conclusion

Comparing SkyWest, Inc. (SKYW) against the ETF JETS, the MMs’ fom indicates the time-sensitive investor has better odds for capital gain n the next 3 months than in a buy of the ETF. But nothing else comes close.

On the other hand, the prospects for a broad-market ETF investment in SPDR S&P500 Index Trust (SPY) would probably not do as well as JETS.

Additional disclosure:Disclaimer: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So, our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name. First months of 2020 to date have produced over 2400 profitable position closeouts in a 76%/24% win-loss ratio.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SKYW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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