British serial entrepreneur and billionaire Sir Richard Branson famously said that “if you want to be a millionaire, start with a billion dollars and launch a new airline“. Airlines are notoriously cyclical and their high fixed costs and CapEx needs make them very inflexible, threatening their very survival in a crisis. Prospective investors must constantly remind themselves of this fact, especially near peak-cycle, when airline stocks seem ridiculously cheap based on their recent record profits. Headquartered in Leeds, UK, Jet2 Plc is a good example.
The company boasted record revenue and profits prior to both the 2008 crisis and the Covid-19 recession. Alas, that didn’t save investors as the stock plunged by more than 90% in each of these two calamities. The company survived, however, and the following recoveries were nothing short of spectacular.
Jet2 stock is up 650% from its March 2020 low. Once again, the company is posting record sales, profits and cash flows. On paper, with its £2.6B market cap, £2B net cash position and £600m in free cash flow in fiscal 2025, it seems the market is giving the company away. We think that this is simply too good to be true, however.
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A quick look at the latest investor presentation of Jet2 reveals that the company is in the middle of upgrading its fleet. The increased capital expenditures are practically going to wipe out free cash flow until 2030. What really worries us, however, is the weekly logarithmic chart above, which shows that the stock could be in for another ~90% sell-off soon.
It reveals that Jet2’s progress since the early-1990s can be seen as a five-wave impulse, marked I-II-III-IV-V. Wave II was a running flat correction, whose wave (b) was a big a-b-c recovery, while wave (c) stands for the first ~90% crash in 2008. Investors who had the courage to buy at the 2008 lows and the patience to hold until early-2020, multiplied their money by more than 170 during wave III.
Then, Covid-19’s heavy blow to the travel industry caused another ~90% plunge from 1950 to 182.50 in just two months in wave IV. This brings us to the present and what looks like an ending diagonal in progress in wave V. According to the Elliott Wave theory, a three-wave correction follows every impulse, usually erasing the entire fifth wave.
If this count is correct, once wave (5) of V completes the pattern near 2100, another major decline should drag Jet2 stock back to the support of wave IV near 200. This is why we can trust neither the company’s seemingly low valuation, nor the rosy outlook. We just don’t think that the latter is going to last long.
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