Another One Bites The Dust
by Charles B. Carlson, CFA
Dow Theory Forecasts

While the last few years have been tough on investors, they've been downright giddy for corporate bankruptcy attorneys. Indeed, several of the biggest corporate bankruptcies in the last twenty years have occurred in 2001 and 2002, the latest being the Chapter 11 filing of UAL, the parent of United Airlines.

Obviously, a plethora of bankruptcies can roil public confidence in stocks, which is why the market tends to respond negatively to bankruptcy announcements, at least initially. But some perspective is needed:

• Investors should not extend the woes of the airline industry to the rest of corporate America. History has shown that making and keeping a buck in the airline industry has been very, very difficult over the years. Thus, the fact that UAL went bankrupt should not be used as a barometer to measure the financial health of corporate America.
  
  
• Excesses need purged. It is clear that the stock market had run to excesses in the late '90s, and those excesses needed to be purged. We have seen a lot of purging in the way of the demise of Internet and technology stock valuations. UAL is just one more way the market is trying to purge itself in order to restore its long-term health.
  
  
• Don't be surprised if you see more airlines going Chapter 11. Remember - while Chapter 11 may be bad news for stockholders, it may actually make an airliner more competitive by giving it leeway to rewrite labor deals. Once UAL emerges from Chapter 11, my guess is that it will be a much leaner, more competitive firm. Which means that . . .
  
  
• Don't be too quick to jump into any airline stock. A more competitive UAL may cause more trouble for other airlines.

Bottom line: As tempting as some of the airline valuations look, the industry is suitable only for aggressive traders and not long-term investors.

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