While virtually every area of the economy was affected by the pandemic, many would argue that travel, particularly air travel and cruise lines, was most adversely impacted. And Delta was considered by many to be the king of the airline jungle. After emerging from bankruptcy in 2008—and spending at least a couple of its nine lives in the process—the company had gone on to become the industry leader in 2019. A threat as unprecedented as COVID-19, however, threatened the company in new ways. How could investors grapple with Delta’s future when the virus itself continued to rage? No less than Warren Buffett first jumped on the opportunity to purchase the stock before, relatively quickly, reversing course and selling again. If such a legendary investor couldn’t gauge Delta’s value correctly, what hope does the average investor have? Perhaps the Human Factor has the answer.
The Human Factor measures the probability that a company will fail to deliver the growth implied by its stock price. This may be caused by investors interpreting vague and ambiguous information in a systematically incorrect way. In Delta’s case, this information had never been encountered by the modern stock market and had strong potential to either overprice or underprice the stock price.
Human Behavior’s Impact on Delta
- Prior to the pandemic, Delta (NYSE: DAL) traded between $40 and $50 for at least five years. In the depths of the pandemic, shares bottomed out at approximately $25—approximately half their previous trading price.
- Delta’s situation was further complicated by the effects, potential or otherwise, of Federal assistance. At the worst of the pandemic, some felt that bailouts were imminent. Despite fleets of grounded planes, people thought Delta and other major carriers would prove to be bargains once these bailouts occurred. This proved to be a temporary boon to stocks and, some might say, helped carry the industry until the anticipated “Reopening” of the economy. But could it last?
- At New Age Alpha, we focus only on the information that is known (neither the vague nor the ambiguous). As of April 1, 2021, based upon Delta’s stock price and the known financial information (financial statements), we believe there is a 28.0% chance that Delta will fail to deliver the growth implied by its stock price.
- With a Human Factor of approximately 28.0%, we believe that Delta may be underpriced and appears likely to deliver the growth implied by its stock price. Remember, the lower the Human Factor the more likely vague and ambiguous information has NOT been priced into the stock.
Delta's Position in its Industry
- As of April 1, 2021, Delta had a better Human Factor score than many of its peers in the Industrials sector. While Delta had a score of 28.0%, the sector had a median Human Factor of 59.5%. Of the 72 companies in the sector in the S&P 500® Index, Delta’s is fifth (5th) overall according to Human Factor.
- At the same time, a similar situation holds true within its Industry Group. The median Human Factor of the Transportation Group is 56.0% and each of the other 14 members have a higher Human Factor score than Delta.
- According to our analysis, Delta is also the most attractive stock within the Airlines Sub-Industry Group. Its low 28.0% probability of failing to deliver the growth implied by its stock price compares favorably to others in group: Alaska Air (38.1%), United Airlines (53.5%), Southwest Airlines (56.0%), and American Airlines (58.6%).
Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. An investor utilizing the Human Factor may experience a loss. No client or prospective client should assume that any information presented in this article serves as the receipt of, or a substitute for, personalized individual advice from New Age Alpha or any other investment professional. All research and data are simulated and should not be considered indicative of the skill of New Age Alpha.
The accuracy of the Human Factor is materially reliant on the integrity of the information utilized in the calculations, including any assumptions and or interpretations made by the user about the data. Data discrepancies, and user assumptions, can all contribute to differing outcomes. The underlying assumptions and processes presented herein are subject to change. New Age Alpha reserves the right, in its sole discretion, without any obligation and without any notice, to modify the information contained in this material, or to correct any errors or omissions in any portion of this material at any time.
The Communications Services Sector and Industry Groups referenced in this insight is based upon the Global Industry Classification Standard (“GICS”), which is an industry taxonomy developed in 1999 by MSCI and Standard & Poor's for use by the global financial community. The GICS structure consists of 11 sectors, 24 industry groups, 69 industries and 158 sub-industries into which S&P has categorized all major public companies.
The above statements are not an endorsement of any company or a recommendation to buy, sell or hold any particular security. Investors are urged to consult with their financial advisors before buying or selling any securities. The views stated herein are only current through the date stated and are subject to change at any time based on market or other conditions and New Age Alpha disclaims any responsibility to update such views. Any Human Factor information or charts presented herein or utilized in the Human Factor system are provided for illustrative purposes only. The Human Factor information provided herein is a snapshot taken at a particular point in time and any analysis or information contained in this document is outdated and should not be relied upon as investment advice. Moreover, the information presented in this document may have changed materially from the date on which it was created. New Age Alpha may or may not currently own the securities at the times set forth in this article. There is no intention for New Age Alpha to include these securities in its portfolios unless it becomes part of the established universe of eligible securities that are part of each specific investment strategy (e.g. the S&P 500®). It is important to note that there can be no guarantee that the application of the Human Factor to investment portfolios or certain stocks or securities can produce profitable results.
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