The drop in GOL stock is not what you think it is

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Brazilian airline Gol Linhas Aéreas Inteligentes ( GOL , quote ) is trading sharply lower today on news that supply decreased for the month of March . In spite of the negative reaction to this data, today's price action may actually present a compelling buying opportunity for long-term investors.

Image courtesy Leandro Ciuffo: http://www.flickr.com/people/leandroneumann/ GOL reported a year-over-year 2.9% decline in March supply in an announcement this morning. However, these lower numbers are in fact an integral component of the airline's strategy for returning to profitability this fiscal year.

As opposed to last year, during which the Brazilian domestic aviation industry endured a brutal fare war with TAM ( quote ), GOL has opted to decrease capacity in order to increase profitability through the elimination of some unprofitable, poorly timed, and longer stage-length operations.

Ideally, GOL would have liked to have seen an increase in load factors with fewer seats available for March. That being said, even though GOL's March load factors were lower YOY by 4.5%, this is by no means indicative of an ineffective strategy; rather, GOL's load factors and demand were both affected by Carnival falling during March in 2011 and February in 2012 which skewed monthly traffic numbers. Investors should pay careful attention to April load factor numbers released by the firm for more definitive evidence of the efficacy of GOL's strategy.

For short-term traders, GOL remains in a downtrend. As a result, the stock is likely to test its 52-week low at 5.03. Support here could see the stock rebound; a breach could see further downside.

On the other hand, long-term investors are starting to see compelling values at these levels.

However, investors must be cognizant of two hurdles that are likely to affect the stock over the short-to-medium term: high oil prices and a weakening Brazilian real vis à vis the dollar. A decrease in oil prices over the summer, a strong possibility in light of potentially weakening global demand, would buoy GOL's share price.

Investors with a long-term time horizon could start to scale into a position here, as the stock is starting to look cheap with a forward P/E of roughly 10. Over the long-term, as oil prices eventually revert to the mean and Brazil's economy continues to grow, GOL offers a great way to play the increase in travel demand from both foreigners and Brazil's fast growing middle class.

Disclosure: Author may initiate a position in GOL within the next 72 hours

charterino



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International , Stocks

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