Use Short-Term Weakness to Buy Oligopoly Stocks

Many sectors condense over time into just a few players. An oligopoly can be great for investors, as companies tend to look for ways to improve their profitability, rather than spend considerable money on expansion once there’s a small and stable number of players in the market.

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  • That can lead to good investment returns. The returns can improve when investors buy during short-term market fears. That includes the opportunities hitting one company harder during earnings season compared to others.

    For instance, JetBlue Airways (JBLU) has been hit. Besides reporting that the company doesn’t expect to earn a profit next quarter, they lowered their full-year guidance. The airliner has also been under pressure given its upcoming merger with Spirit Airlines (SAVE).

    The merger will create a sizeable network and give the combined company a solid position to improve operations and profitability in the years ahead, looking well beyond a short-term slowdown in airline demand.

    Action to take: Shares are near a multi-year low, and go for less than ten times forward earnings, even reflecting the slowdown. That looks oversold in the short-term, making for a contrarian buy here.

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  • For traders, JetBlue is likely to rebound. The January $8 calls, last going for about $0.63, could see high double-digit returns before their expiration on any rally in shares in the next six months.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.