Airline Stocks’ Selloff Was Predictably Overdone

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Airline stocks plummeted yesterday on news that the Department of Justice was investigating the possibility of price fixing among some of the major airlines.

airline stocks investigation

As usual, the selling was excessive.

Indeed, shares in the major airlines known to be under investigation — American Airlines (AAL), United Continental Holdings (UAL), Delta Air Lines (DAL) and Southwest Airlines (LUV) — were down anywhere from 2% to 5% late Wednesday, but were already bouncing back Thursday.

And that’s the way it goes. The market’s immediate reaction to bad news is always to sell first and ask questions later.

That’s why airline stocks were hammered even though there’s no way to guess the potential costs of a federal investigation. The market hates uncertainty — the DoJ investigation opens airline stocks up to further headline risk, if nothing else — and that’s as good a reason to panic as any.

The world, however, is not coming to an end. As Stifel analyst Joseph DeNardi said in a note to clients:

“Clearly, we have little visibility into what internal emails from airlines will show if that is in fact what the DoJ is interested in seeing, but in terms of what airlines have said publicly and what capacity and pricing trends show, we don’t see much of a case for how the industry has colluded. It’s simply too early in the process and not enough is known about the investigation to gauge the risk.”

If the issue is that airlines colluded by signaling their capacity plans to one another, that data is publicly available through published schedules, the analyst points out, so no foul there.

Airline Stocks Have Weathered Federal Storms Before

It’s also important to remember that DoJ actions sound scarier than they often turn out to be. Don’t forget that a couple of years ago, the Justice Department challenged the merger of U.S. Airways and American Airlines with an antitrust lawsuit.

Investors panicked, but three months later the DoJ gave a green light to the merger (after extracting some concessions).

That’s pretty much the playbook for these things. They drag on for months or years, but end in a settlement that is usually so well-telegraphed it’s already priced into shares.

Sometimes it doesn’t even make the front page.

For now, with nothing solid to go on, additional emotional selling of airlines stocks is certainly possible, but bargain hunters are already taking advantage of Wednesday’s drubbing. With a long weekend to cool off, this trade will be over.

After all, AAL, UAL, LUV and DAL dropped anywhere from 5% to 5.5% at one point in yesterday’s session, but they all finished strong into the close.

That’s usually a good sign, and sure enough, AAL, UAL, LUV and DAL continued to recover after Thursday’s opening bell.

Yes, the DoJ action will be a headwind for airline stocks at a time when they’re already having a tough year. That said, it’s not in and of itself a sufficient reason to bail out on these names.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/airline-stocks-investigation-aal-ual-luv-dal/.

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