Saying Goodbye to One of My Best Ideas of 2015
Volaris Aviation (VLRS) was one of my favorite picks of 2015 and the stock has continued to perform well this year as well as the stock is up almost 6% YTD. The stock has appreciated almost 80% since I first called it a buy.While I still like the company’s prospects, I think it may be time for investors to consider selling the stock and book some profits. Although I think Volaris can continue delivering strong earnings, I think investors should consider booking a profit amid the current market sentiment.
Given the recent bearish sentiment of the market, it would be better for investors to cash in on the recent rally and sell Volaris.
Strength of dollar
The increasing strength of the U.S. dollar against the Mexican Peso can act as a massive headwind for Volaris going forward. Since the company generates the maximum amount of its revenue from the Mexican market, the increasing strength of the U.S. dollar can have a negative impact on its earnings.
Although the company is expanding into the U.S. market, it still generates the majority of its revenue from the domestic market. Hence, I think investors should be on the safe side and take profits off the table.
Increasing price war
Due to cheap crude, many airlines have started cutting air fares in order to lure more travelers. Cheaper tickets have resulted in a huge decline in unit revenue across the entire aviation sector. Unit revenue is a very important metric and investors primarily use it to ensure that the price war doesn’t prove destructive for the airlines.
In the past, many airlines have gone bust because of competing on price. As a result, declining unit revenue may spook investors away from airlines stocks.
Although I think Volaris has a lot of room to expand, I think investors should play in safe in the current market by selling the stock and booking a profit. Volaris faces a few headwinds going forward and can lose considerable amount of value in a bear market. For these reasons, I think investors should sell the stock and book a hefty profit.
Published on Feb 17, 2016By Ayush Singh