Market Overview

Small-Cap Corner: Flying Higher (SKYW, FAA, DAL)

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Airline stocks have found friendly skies in recent weeks, thanks in large part to slumping oil prices. In the past month, the Guggenheim Airline ETF (NYSE: FAA) has risen 11.1 percent while the U.S. Oil Fund (NYSE: USO), an ETF that tracks front-month West Texas Intermediate oil futures, has slid 11.4 percent.

The bounce in airline stocks has had a positive, albeit predictable, impact on the industry's more recognizable names. Delta (NYSE: DAL), Southwest (NYSE: LUV), and United Continental (NYSE: UAL) have all posted double-digit returns since May 21. Select small-cap airlines have also benefited from slumping oil prices. One of the small-cap carriers that has only recently started to show signs of life is SkyWest (NASDAQ: SKYW). Utah-based SkyWest is a regional carrier operating short-distance flights for Delta and United Continental, among others.

In theory, the SkyWest's status as a regional carrier should be a boon for the stock as it implies that the company is less levered to oil prices. In reality, the shares have tumbled almost 12 percent in the past month as larger airlines have rallied. If there is a bright spot, it is that SkyWest shares have caught a bid in the past week, jumping nearly 4 percent.

That divergent performance relative to more widely recognizable airline names could prove to be a red flag. SkyWest's market capitalization of just under $354 million puts the stock not far beyond micro-cap territory and the tiny market value could mean that some investors view the stock as highly speculative. Given that SkyWest recently traded at a 52-week low of $6.25, there might be something to the argument - SkyWest is, in fact, a highly speculative stock in a speculative sector.

The bull case for SkyWest is somewhat tepid, but there are at least two points in the stock's favor. First, the shares yield 2.3 percent. Although the number is not wonderful, it is about 40 basis points better than what is offered by the SPDR S&P 500 (NYSE: SPY). SkyWest has paid a dividend for 68 consecutive quarters.

Second, the technical outlook is improving. The stock touched $7 on June 20, the first time it has done so since May 31. Additionally, the 20-day moving average has been cleared and SkyWest now has a clear runway to the $8 area before facing its next resistance.

Bottom line: SkyWest's technical picture is compelling and declining oil prices are a positive fundamental catalyst, but the stock needs investors to put value on those factors in order to shed its speculative label.

Posted-In: Long Ideas Sector ETFs Short Ideas Dividends Small Cap Analysis Technicals Markets Trading Ideas Best of Benzinga


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