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Airlines Battered On Revelation Of Possible Collusion

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In a surprising announcement from the Justice Department, the government agency is ready to investigate a possible collusion between airlines to slow down their growth, hence keeping airfares and margins higher. The government is requesting information from various airline groups and United Continental Holdings Inc (NYSE:UAL)’s United Airlines is the first of the airliners to have announced the receipt of a government letter. According to a spokeswoman from the Justice Department, Emily Pierce, the department is conducting an antitrust investigation to find any “unlawful coordination” among airline companies. Apart from the current investigation, it is important to consider that American Airlines Group Inc (NASDAQ:AAL), Delta Air Lines, Inc. (NYSE:DAL), United Continental Holdings Inc (NYSE:UAL), and Southwest Airlines Co (NYSE:LUV), the shares of which were all battered in trading late Wednesday following the revelation, together account for 80% of the seats in the U.S. airline industry. Each of these airlines has agreed to comply with the Department’s request, although it is not clear which of these airlines is under investigation.

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The shares of each of these airlines fell after the announcement, including a 3.37% drop in the shares of JetBlue Airways Corporation (NASDAQ:JBLU), a 1.95% drop for Delta Air Lines, Inc. (NYSE:DAL), a 2.43% drop for United Continental Holdings Inc (NYSE:UAL), and a 1.42% decline in the share price of Southwest Airlines Co (NYSE:LUV). United Continental Holdings Inc (NYSE:UAL)’s shares have already endured a rough year, having dropped by 21.74% year-to-date, but the hedge funds tracked at Insider Monkey have maintained a bullish outlook on the company. 78 hedge fund managers were invested in the holding company on March 31, with aggregate investments of $3.92 billion against previous quarter investments of $3.73 billion made by 79 hedge fund managers. GMT Capital, managed by Thomas E. Claugus was among the primary shareholders of the company, opening a new position worth $474.37 million of 7.05 million shares in the first quarter. A similar trend was witnessed in Southwest Airlines Co (NYSE:LUV), which received net investments of $2.07 billion from 44 hedge fund managers against prior quarter’s total investments of $1.93 billion from an equal number of investors. John Armitage‘s Egerton Capital Limited held 19.38 million shares of the airliner at the end of the first quarter, valued at $858.69 million.

John Armitage
John Armitage
Egerton Capital Limited

However, we don’t just track the latest moves of funds. We are, in fact, more interested in their 13F filings, which we use to determine the top 15 small-cap stocks held by the funds we track. We gather and share this information based on 16 years of research, with backtests for the period between 1999 and 2012 and forward testing for the last 2.5 years. The results of our analysis show that these 15 most popular small-cap picks have a great potential to outperform the market, beating the S&P 500 Total Return Index by nearly one percentage point per month in backtests. Moreover, since the beginning of forward testing in August 2012, the strategy worked brilliantly, outperforming the market every year and returning 135%, which is more than 80 percentage points higher than the returns of the S&P 500 ETF (SPY) (see more details).

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