Is this any way to buy an airline?

BOSTON (MarketWatch) � The sales pitch for AMR Corp. stock � the parent company of American Airlines � would read like something out of a penny-stock promoter�s email.

The promoter would overlook the company�s status in bankruptcy court, and focus instead on how the industry has been hot. Or it would be noted that the stock is trading at less than 10% of its 52-week high, making it poised for a bounce-back, especially if oil prices drop.

Click to Play Flying the unfriendly skies

Chuck Jaffe joins Markets Hub to discuss how investors should approach airline stocks. (Photo: Joe Raedle/Getty Images)

Most investors would get a sales pitch like this and hit the delete key. So when the top dog at American Airlines said this week that the company is evaluating potential merger partners and will reach out to interested parties, it should have made average investors wonder why, exactly, anyone would want to invest in an airline right now. Read more: Airline stocks to hit turbulence, Goldman analyst says.

It�s an interesting question not just for the future of AMR Corp., AAMRQ �but for investors to consider as they search for opportunities in an environment overwrought with headline risk.

But in answering the question of �Who wants to buy an airline?� investors get a strong reminder in how knowledge, power, nerve ,and timing are just about everything in investing. Lacking any one of those traits is a problem, but missing any two of them turns investing into gambling.

Consider AMR and the airlines. The story this week was that AMR will reach out to at least five competitors � including US Airways Group Inc. LCC , JetBlue Airways Corp. JBLU , Alaska Air Group Inc. ALK , Frontier Airlines and Virgin America � as well as private-equity firms and others.

The airline industry has a long history of abysmal finances. Early in my career I covered the airline industry for a newspaper in Florida, and the story I wrote most often involved a carrier filing for bankruptcy. The typical pattern is that a company emerges from bankruptcy court stronger, the worst of the economic cycle played out, with a rally and then another crash and reorganization.

This pattern also affects investors who favor airlines. The problem with volatile industries is that most investors get in after the trend is recognized and then wind up with terrible results.

For example, Guggenheim Airline ETF FAA � has had a feast-or-famine performance history in its short lifespan. After a 29.5% gain in 2010, the exchange-traded fund lost roughly one-third of its value in 2011. This year it�s up almost 19% so far. Meanwhile, Fidelity Select Air Transportation Fund FSAIX � has been a bit smoother; in the last five calendar years, it�s had two small losses and one big one (32.5% in 2008, but two big winning years � 22.2% in 2009 and 33% in 2010). The fund is up about 10% year-to-date.

Up in the air

Still, trouble can lead to profitable situations.

�You find opportunities by finding good companies that are being dragged down by bad situations,� said Charles Rotblut, editor of AAII Journal.

/quotes/zigman/8007147/quotes/nls/aamrq AAMRQ 0.50, -0.01, -1.95% /quotes/zigman/241463/quotes/nls/luv LUV 8.90, +0.22, +2.53% American Airlines and Southwest Airlines have different flight plans.

Thus, Rotblut said this week on my radio show that he would be buying Southwest Airlines Co. LUV . The airline, he said, is a quality company priced as if �the market doesn�t care if Southwest opens its doors tomorrow, or if it just shuts down and liquidates its assets.� Read more: Southwest Air: LUV at first sight.

American, on the other hand, is a non-starter, Rotblut said, because once you dig into the financials, the problems that led to the bankruptcy filing are clear.

�The difference between Southwest and American is that not only is Southwest generating positive cash flows, it is well managed,� Rotblut said. �American is having to go to bankruptcy to cut costs. � Guys like Carl Icahn or Warren Buffett � or whoever partners with American � have some say in how the company is run and get favorable terms, but when you are buying in at the market price, you�re taking a chance on a bad condition and hoping it improves.�

AMR will likely find a buyer. The difference is that buyers or merger partners have power, board representation and influence over the company�s flight plan. The big boys are the pilots, while the average investor sits in coach. That doesn�t just apply to AMR, it�s true of any troubled situation.

Thus, you can assume that you will always be missing the �power� part of the critical characteristics for buying worrisome securities.

Knowledge comes from looking at fundamentals and running the numbers. Timing, as already noted, means more than �it looks hot now,� since that is a siren song for investment trouble.

Nerve involves having courage to make a tough decision and the conviction to see it through. Too many investors give up when it looks like they�ve made a mistake and can�t see the investment through to what could have been a victory.