United Airlines CEO Jeff Smisek Is Buying Stock, but Should You?

Many Wall Street airline analysts have finally lost confidence in the United Continental Holdings (NYSE: UAL  ) management team led by CEO Jeff Smisek. However, United executives apparently haven't lost confidence in themselves.

Last week, Smisek spent about $800,000 of his own money to buy 20,000 shares of United Continental stock at an average price just under $40. This brings his holdings of United stock to roughly $20 million.

United Continental's CEO just bought almost $800,000 of stock in the company. Photo: The Motley Fool

But investors shouldn't buy United Continental stock based solely on this show of confidence. Indeed, United's recent financial performance has been quite weak, and it provided weak guidance for the second quarter as well. In light of United's long track record of underperformance under Smisek's leadership, this recent stock purchase may just be further evidence that he is out of touch with reality.

Buying the dips
This isn't the first time that Smisek has stepped up to buy United stock when it was in free fall. According to airline analyst Hunter Keay, Smisek has spent more than $2.4 million on open-market purchases of United shares since August 2011. United stock has risen an average of 40% in the six-month periods following Smisek's other purchases, Keay found.

Based on that history, following Smisek into United Continental stock may seem like a no-brainer. Indeed, Keay recommends the stock, and he believes United's management can fix the company's current problems..

A mixed track record
There's more to Smisek's investing performance, though, than first meets the eye. For example, let's look at his most recent purchase. Last August, airline stocks tumbled as a group after the Department of Justice raised objections to the proposed merger of American Airlines (NASDAQ: AAL  ) and US Airways.

Airline stocks plummeted after the DOJ objected to the American Airlines-US Airways merger. Photo: American Airlines

So the drop in United Continental's stock price last August was not directly related to United's business performance. Nonetheless, Smisek took advantage of the dip to buy United stock at about $28 per share.

Ultimately, the American Airlines-US Airways merger was approved, and airline stocks bounced back. Since the day Smisek made his purchase, United Continental stock has rallied almost 50%.

UAL Chart

United Continental Stock Chart, 8/27/13-present; data by YCharts.

That may sound impressive, but United's gain came from riding the coattails of other airlines. While United has posted mediocre results since last August, carriers such as Delta Air Lines (NYSE: DAL  ) and Southwest Airlines (NYSE: LUV  ) -- not to mention American Airlines -- have reported consistent profit growth.

You could have invested in just about any airline stock in late August last year and earned a tidy profit by now. Indeed, if you invested in any major airline stock other than United, you would be sitting on much bigger gains!

UAL Chart

Airline Stock Performance, 8/27/13-present; data by YCharts.

As the chart shows, shares of Delta Air Lines and Southwest Airlines have nearly doubled since Smisek made his purchase last August. American Airlines' stock (not shown in the chart) has performed even better than that.

A different situation
Smisek's last purchase of United Continental stock worked out well because of the general rally in airline stocks since then. In fact, based on United's recent performance -- it put up an ugly loss last quarter and earnings estimates have been falling steadily in recent months -- it doesn't look like the market was underestimating United's prospects in any way.

There's no way to know whether airline stocks will continue to rally or will fall back to earth. However, as has been the case in recent months, United Continental's stock performance is likely to lag that of more successful competitors such as Delta, American, and Southwest.

While Smisek has a track record of good timing for his purchases of United stock, he also has a track record of mismanaging the company. In the long run, the second trend is more likely to hold -- without strong earnings performance, any stock market gains will be temporary.

Will this stock be your next multibagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2945625, ~/Articles/ArticleHandler.aspx, 8/23/2014 9:49:35 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement