Please ensure Javascript is enabled for purposes of website accessibility

Is United Stock a ‘Buy Bad News’ Candidate?

United stock is getting pummeled for how it treated a passenger on an overbooked flight. In a few weeks, UAL could be the perfect buy-low opportunity.

The video is disturbing: a middle-aged man screaming as he is violently yanked from his seat on an airplane, then dragged down the aisle seemingly unconscious after banging his head on an armrest. This is how United Airlines treats its passengers when a flight is overbooked, apparently. No matter how you rationalize it, the company looks bad here. But does that mean United stock is bad too?

Bad News Hurting United Stock

That’s the way investors treated United Continental Holdings (UAL) on Tuesday, after the video (recorded on a smartphone by a fellow passenger) started making the rounds and United’s CEO Oscar Munoz fanned the flames of an outraged Twitter-verse by refusing to apologize for the “upsetting event” (his words). The universal outrage translated to a 4% pullback in United stock in early Tuesday trading. I’m guessing the bleeding won’t stop there; United stock likely has a few more rough days ahead of it until the angry mob turns its attention elsewhere (or perhaps until Munoz issues a real apology).

[text_ad]

This kind of circumstance is nothing new on Wall Street. Investors routinely punish companies embroiled in scandals that attract a litany of embarrassing headlines. It’s easy to understand why: no one wants to be associated with a company that’s become a national punchline or lightning rod. Or, at least that’s investors’ initial, guttural reaction. Heck, if I owned United stock, I probably would have sold it all after watching that poor man forcibly removed from a flight by police officers (on the airline’s orders). If you haven’t seen the video, it really makes your blood boil.

But investors have short memories. With some exceptions (see Chipotle (CMG) stock), embarrassing incidents like this tend to blow over. If people decide to boycott United Continental flights in droves, and this ugly incident affects sales for months and years to come, then this scandal may do some serious long-term damage to the company, and United stock. But United’s second-quarter earnings won’t be out until mid-July. First-quarter earnings are due out next week. An earnings beat there could easily turn the tide for UAL stock.

Investors are opportunistic. The savviest among them are always looking to gain an edge, and buying bad news is one way to find value. In fact, it’s a tenet of legendary value investor Warren Buffett: “Be greedy when others are fearful.” Baron Rothschild, an 18th century British nobleman and banker, put it more graphically: “The time to buy is when there’s blood in the streets.”

Blood on the customers is a whole ‘nother matter. But you get the idea. Buying companies that investors have punished for bad news or bad PR (or, in United’s case, both) is a great way to find bargain stocks. And as of this writing, UAL stock trades at just 10 times forward earnings, is up more than 23% over the last 12 months despite Tuesday’s drop-off (see chart below), and has beaten earnings estimates in each of the last four quarters. While United’s sales have been stagnant and earnings per share declined 51% last quarter, that hasn’t stopped United stock from gaining traction with investors—including Mr. Buffett himself, who added to his position in UAL and other airline stocks in the fourth quarter of 2016.

United stock (UAL) is up more than 23% in the last year even after Tuesday's decline.

Buy UAL In a Week?

You may be too disgusted with United Continental to buy stock in the company. You may want to swear off the airline altogether knowing that it would treat one of its customers that way. If that’s the case, I could not be more sympathetic.

However, if you have the stomach for it—and believe this was an isolated incident that could happen at any airline (though I sincerely hope not)—then chances are you can profit from United stock once the dust settles. You should probably wait until after next Monday’s (April 17) earnings report at least. If the company beats estimates again, it could spark a turnaround—assuming most of the outrage has subsided by then.

Buying bad news can be a dirty business. But it can also be highly profitable.

[author_ad]

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .