One Simple Tool Spotted This Airline's Wipeout Years Ago
Editor's note: No matter how strong an industry sector is, there are always stocks that can tank your portfolio. That's why our colleague Vic Lederman, from our corporate affiliate Chaikin Analytics, relies on a set of key indicators to look beneath the surface. In this piece, adapted from a November issue of the free Chaikin PowerFeed e-letter, Vic explains how investors could have used this system to avoid a 90%-plus loss...
Folks, yet another American airline is facing financial hardship...
On November 18, Spirit Airlines announced that it had filed for bankruptcy.
Now, that doesn't mean that the business is folding. Spirit has entered into a new agreement with its bondholders.
In an open letter to its customers, the company said the deal is "expected to reduce our total debt, provide increased financial flexibility," and "position Spirit for long-term success."
But that doesn't mean a turnaround has started...
Spirit's stock tumbled a staggering 93% before announcing its bankruptcy. Put simply, the stock was a disaster for investors.
And yet, it didn't have to be this way...
Our Power Gauge system at Chaikin Analytics saw this wipeout in progress years ago. So today, let's take a look at how easy this was to spot on the chart...
When it comes to share-price collapse, Spirit's wipeout was about as bad as it gets.
Investors who bought the stock at the start of this year lost nearly everything.
The bet wasn't that crazy on its surface, either. In fact, the Power Gauge currently rates the passenger-airlines industry group as strong.
Looking closer, we see that Delta Air Lines (DAL) has soared roughly 46% this year. Over the same time frame, United Airlines (UAL) is up an incredible 122%.
So it made some sense that investors were also betting on Spirit.
But with the Power Gauge, we could've easily seen why that was a terrible bet. The Power Gauge is a tool we use at Chaikin Analytics to gather a wide array of investment fundamentals, technicals, and more into a simple rating of "bullish," "neutral," or "bearish."
Take a look at this five-year chart of Spirit's stock with some data from our system...
Look at the bottom panel under the chart... Spirit hadn't earned a "bullish" rating since 2020. And even that little blip of a positive rating was incredibly short-lived.
Moving up, the next panel shows Spirit's relative strength versus the broad market S&P 500. And once again, it's a sea of red. Spirit underperformed the market for nearly the entire five years.
Lastly, take a look at the Chaikin Money Flow panel right under the chart...
The Chaikin Money Flow is a technical indicator. Chaikin Analytics founder Marc Chaikin developed it back in the 1980s.
It measures the buying patterns of "smart money" investors. In other words, it helps us identify institutional buying.
And as you can see, Spirit hadn't received a lot of love from the smart money over the past few years.
Putting it all together, Spirit was in a rough place for a long time.
Spirit's stock underperformed the broad market for years... Its relative strength was atrocious... And the smart money avoided the stock.
These are all critical signals to watch in an investment. Combine that with Spirit's disastrous financials, and it's no surprise the stock spent so much time in "bearish" territory – even before the bankruptcy announcement.
Investors who held this stock hoping for a turnaround were crushed.
But the Power Gauge made it clear that the best call was to avoid Spirit. And with our system's help – and the indicators it uses – we can also avoid other stocks like it.
Good investing,
Vic Lederman
Editor's note: Marc is a "living legend" on Wall Street. He has traded through 13 presidential elections... And he has navigated nearly every critical market move of the past few years using his Power Gauge – with astounding results.
Last year, the Power Gauge flagged 44 of the top 50 performing stocks before they took off. And now, Marc sees a story unfolding that no one with money in U.S. stocks can afford to miss... Get the full details here.
Further Reading
"The world is awash in conflicting information right now," Marc Chaikin writes. Even with the election behind us, new headlines can always scare investors out of stocks. But if you let the media confuse you, you could miss out on some of the greatest opportunities the market will ever give you... Learn more here.
The S&P 500 has soared this year. But even in a bull market, you aren't obligated to hold all 500 stocks in the index. And using the Power Gauge, investors can spot the dangerous percentage of bearish stocks hiding in the market – and avoid potential wealth destroyers... Read more here.