Although the S&P 500 continues to hit new all-time highs, doesn’t mean all stocks are moving forward in a straight line. FANG stocks and the Nasdaq Composite took a nasty spill, while retail has had its fair share of struggles. The Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) has spent most of 2017 tripping over its own two feet to make new lows. But not all is bad and one group could be looking to extend its gains: Airline stocks.
Broadly speaking, airline stocks trade with a low valuation and benefit from their largest input cost — oil — falling. It helps too that Warren Buffett has been placing big bets in the industry.
Further, as the U.S. and global economy continue to improve, flights will be in higher demand. This is from a consumer standpoint, as well as a business standpoint. Individuals, couples and families will be more open to cracking open the wallet and booking a vacation during good times. Likewise, businesses will be more willing to send employees on more trips for work.
Let’s not waste any time and take a look at what we have.
Airline Stocks to Buy: Delta Air Lines (DAL)
It’s quite possible that Delta Air Lines, Inc. (NYSE:DAL) is the most attractive airline stock to buy at this point. The stock is up a little more than 7% on the year and if all goes well, those gains should continue.
So what makes DAL so attractive?
First, the stock trades at about 10x forward 2017 earnings expectations of $5.30 per share. That’s a remarkably low valuation for an industry-leading company that’s quite profitable and should be for the foreseeable future.
In addition, DAL stock pays a 1.5% dividend yield. After initiating a dividend in 2013, Delta has increased its payout by 50% in each July since. In that regard, we can likely expect another 50% increase in about a month.
Last quarter, Delta said its pre-tax income for the quarter was $847 million. This was a $713 million decrease from the same quarter a year ago. Management mostly blamed higher fuel costs for the decline. But given that oil prices are down about 25% on the year, Delta should be one to benefit.
Then there’s Warren Buffett. If he’s not a catalyst, he’s at least a reassurance. Earlier this year, it was made public that he has more than 55 million shares of DAL stock. In other words, he owns about 7.5% of the outstanding stock.
Finally, there’s the stock price. The $51 to $52 area has been heavy resistance for Delta Air Lines stock. But the stock has finally broke through that level. So long as it can hold above this level, it should act as support going forward. Investors with a low risk tolerance can also use it as a stop-loss.
Airline Stocks to Buy: Alaska Airlines (ALK)
Part of the attraction to DAL is that the stock is now above resistance. The same cannot be said for Alaska Air Group, Inc. (NYSE:ALK). However, the stock is working on breaking through a smaller level of resistance. If it’s able to, it will put the recent all-time highs back in target.
Looking at the charts, $92 is a Donald Trump “YUGE” level. From January through March 2017, this level served as strong support. Now though, it acts as resistance.
However, with the positive-trending 21-day moving average acting as support and ALK stock retesting the $92-level again after just a few weeks is constructive. If ALK can break above, the next target is $101.43 — just over 10% upside if it gets there.
Traders and short-term investors can wait for a breakout over this level and buy the stock. A close below $92 can then act as a stop-loss.
But there’s more than just technicals at play here. Alaska pays a dividend of 1.3% and recently acquired Virgin Airlines. The move boosts its flight routes around the country and allows it diversify beyond the West Coast.
Additionally, analysts expect earnings to grow 10.4% this year, 7.2% in 2018 and 9.6% annually for the next five years. All of this for just 10.5x forward earnings. Although ALK is much smaller than Delta — a market cap of $11 billion vs. $39 billion — it’s still got solid growth potential going forward.
If ALK breaks out, investors have a clear-cut risk/reward situation. It will allow for big upside potential and minimal downside losses.
Airline Stocks to Buy: Southwest Airlines (LUV)
Delta isn’t the only airline Warren Buffett owns. He’s got almost 48 million shares of Southwest Airlines Co (NYSE:LUV) — good for almost 8% of outstanding stock. Buffett also has big positions in American Airlines Group Inc (NASDAQ:AAL) and United Continental Holdings Inc (NYSE:UAL).
Let’s start with fundamentals. LUV stock trades at 13x forward earnings estimates. That’s higher than Alaska and Delta, but it’s still quite cheap. Especially when considering that analysts expect roughly 24% earnings growth in 2018 and 12% annual growth for the next five years.
Admittedly, analysts only expect 3% earnings growth in 2017 and just mid-single digit revenue growth in 2017 and 2018. But Southwest is as consistent as they come.
It’s sub-1% dividend yield won’t knock anyone’s socks off, but it’s better than nothing. Last month, Southwest gave a dividend a 25% boost and announced a new $2 billion share repurchase plan. With Buffett holding (and rarely selling) an ~8% position and LUV lapping up stock, that’s good news for shareholders.
One negative is that the stock is up 102% over the past 12 months. Have we missed the move? Maybe a big part of it, but that doesn’t we can’t enjoy some gains too.
In May, LUV broke through resistance at $59. In June, that level became support. After taking out its year-highs, LUV stock is now taking flight. Without any overhead resistance, investors can expect more upside. For the risk-adverse, consider a stop-loss below recent highs near $61 or current, larger support below $59.