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United Airlines Stock — Buy or Bail?

United Airlines Stock – Buy or Bail?

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United Airlines’ terrible, horrible, no good, very bad week began when its ground personnel in Chicago chose to forcibly remove a passenger to make room for the carrier’s employees.

A video of the disturbing knock-down, drag-out removal — what United called a "re-accommodation"— went viral, and the CEO, Oscar Munoz, responded to the public outcry by, inconceivably, defending United and its staff. I suspect that Mr. Munoz may soon find himself a business-school case study on how not to handle such a public relations powder keg. (United’s “Fly the friendly skies” slogan apparently didn’t translate well to how it treats passengers on the ground.)

Not surprisingly, parent company United Continental Holdings Inc. lost nearly $570 million within the first week. Going forward, investors may question whether it is a bargain or a stock to avoid.

United is far from the first company to have a PR disaster. Last year, for instance, Wells Fargo admitted to opening a couple of million phony accounts, and in 2015, Volkswagen fessed up to manipulating emissions data. And, of course, no one will forget the BP Deepwater Horizon oil spill of 2010. Though the CEOs didn’t keep their jobs, the companies survived.

There is a saying on Wall Street that you buy on bad news and sell on good news. It’s a contrarian strategy that counts on investors overreacting to both. For example, Wells Fargo’s stock lost 13 percent in September 2016, after news of the phony accounts. Yet it quickly recovered and now trades above the price before that bad news was released. Volkswagen’s stock hasn’t returned to its pre-emissions-scandal level, but the price is well above what it was immediately following the disclosure. Even BP is trading above its 2010 low, which is surprising considering that the price of oil has declined significantly.

What this means

Admittedly, three examples of recoveries of various degrees aren’t exactly statistical validation, and research into the subject of buying on bad news hasn’t been conclusive. Yet my view is that if the company learns from the disaster and changes its practices, it may still be a good buy.

Though the $570 million discount on United may seem like a lot, the stock lost only 1.5 percent of its value for the week ending April 14. While that’s more than double the 0.6 percent loss for the S&P 500 index, the drop isn’t a catastrophe. Investors may be counting on the fact that people have short memories.

My advice

United’s stock remains volatile, but how long that turbulence will last is unknown.

If I knew the answer, I wouldn’t be working for a living and certainly wouldn’t be writing about it. Still, I am known to have a small fun portfolio and subscribe to occasionally buying badly beaten-up stocks for little money. It exercises a piece of my brain that wants to have a bit of fun, something broad index funds (the core of my portfolio) just can’t do. But they do illustrate the importance of diversifying against bad news from a single company. And that’s the best lesson of all.

Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.

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