3 Airline Stocks Running Into Turbulence

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Stocks are under pressure on Monday as traders return from the long holiday weekend and come back to reality. The Dow Jones Industrial Average is struggling to hold above the 17,000 level (and Dow mini-futures are near 16,900) as worries mount over Tuesday’s unofficial start of Q2 earnings season amid very high expectations.

United AirlinesThe geopolitical situation is also simmering with Israel gearing up for another conflict in Gaza and the U.S. government scrambling to respond to a potential al-Qaida plan to bomb an airliner with dummy phones or laptops.

Airline stocks are under pressure in response. The industry was already on its heels after Delta Air Lines (DAL) reported disappointing passenger revenue for June last week. Stocks in the group were massively overextended and were the target of successful put option positions for my Edge Pro subscribers back in April. We bagged a 256% return on our April puts against American Airlines (AAL) at the time. Our Southwest Airlines (LUV) position gained 140%. And our United Continental (UAL) position gained 100.4%.

I think the industry is ready to hit another pocket of turbulence, with shares likely to lose additional altitude. Here are three vulnerable looking airline stocks ready for put option or short side plays:

Airline Stocks Hitting Turbulence – Delta Air Lines (DAL)

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Delta Air Lines (DAL) got the bout of weakness going last week when it reported that excess seat capacity in some international markets was putting downward pressure on fares. This followed a cut by Germany’s Lufthansa to its 2014 and 2015 earnings forecast driven by excess seat capacity in the trans-Atlantic route.

The company’s overall unit revenue, or sale price for each seat flown per mile, gained 4.5% in June from a year ago thanks to strong domestic performance. But it’s down from 6% in May, stoking concerns that revenue growth is slowing.

Shares of DAL are dropping hard below their 50-day moving average as they enter a downtrend for the first time since April. I’ve recommended the Aug $37 puts to my clients.

Airline Stocks Hitting Turbulence – American Airlines (AAL)

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American Airlines (AAL) shares enjoyed a lift out of their April lows on the regulatory approval of the company’s $17 billion merger with US Airways, reading the world’s largest airline. But after forming a double-top pattern in June, the stock is on the slide again violating its 50-day moving average for the first time since early May.

I’ve recommended the Aug $40 puts to my clients.

Airline Stocks Hitting Turbulence – United Continental (UAL)

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United Continental (UAL) shares have been in a holding pattern all year long, mired by resistance near $48, as investors have reacted negatively to a bungled and expensive merger integration between United and Continental.

Analysts at CRT Capital believe a turnaround is coming or else the board will dump the current management team.

That’s easier said than done if revenue growth is about to slow as capacity swells. Management turnover would be disruptive.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.


Article printed from InvestorPlace Media, https://investorplace.com/2014/07/3-airline-stocks-hitting-turbulence/.

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