A Short-Term Catalyst Example - Allegiant Travel
I thought it would be helpful to provide an example of the short-term plays I look for. I live in a small town outside of Bellingham, Washington. Bellingham has a small airport served primarily by Alaska (Horizon) and Allegiant Travel (ALGT). I know some people that work for Allegiant so in April I decided to dig deeper into the company. The more I looked the more I liked it.
Allegiant has a $500 million market cap, so it is relatively small but has enough liquidity for the small investors to get in and out, but not enough for the big Wall Street firms to care about. It is covered by four analysts, which is important. It means that any earnings surprises will likely result in immediate stock price movement. Additionally, the company provides enough information that earnings are somewhat predictable. This is a key point. I am not a guesser, I want a high probability of being right.
Allegiant reports monthly statistics on everything from fuel costs, number of departures, average fare, load factors, etc. All I need to do is create a spreadsheet model to predict what the end result will be and compare it to analyst expectations.
Model creation typically is a two hour process for me. I usually enter in results form the last two years and look for what costs are fixed and what are variable, and what are the drivers of additional cost. For example, with depreciation, I can look at past cost versus number of planes in operation and estimate current and future costs based off that. For fuel costs, which are very significant for an airline, Allegiant provides most of what I need. Allegiant releases their monthly average price per gallon so all I needed to figure out was how much fuel they used. By comparing the number of available seat miles in the current quarter to prior quarters, I am able to approximate change in miles flown, since their stage length (average flight distance) had not changed much.
For Allegiant it resulted in earnings per share beating the market handily. I looked at the stock price and found it reasonable at about $20. My estimates put earnings for the March quarter at around 45 cents versus analysts 34 cents.
The end result
I purchased shares in my Marketocracy portfolio for $20.13 on April 25. Earnings were released on Monday April 28. Allegiant earned 47 cents per share, well over the 34 cent estimate. The stock climbed from $20 to about $28. On April 30, 2007, I sold all my shares at $27.29, for a nice short-term profit.
Some may ask, "Why sell if they beat earnings so easily?" The main reason was that when I put the higher projected fuel cost estimates into my model it revealed that the June quarter will be tough for the company. So I decided to take the profits. The stock will stay on my watch list because it will benefit greatly from any drop in oil prices should that occur.