Along with reporting better-than-expected fourth-quarter earnings last week, United Continental Holdings Inc (NYSE:UAL) also announced plans to increase its capacity in the coming years in an effort to fight off competition from low-cost carriers that have been going after the larger airlines recently. The goal is to boost capacity 4%-6% annually between 2018 and 2020.
The news sparked an industry-wide sell-off as it raised concerns of a price war that could hurt the related companies’ bottom lines. However, now that the selling appears to have slowed, it is creating an opportunity for investors to scoop up the airliners at a discount.
A few names in particular stand out to me:
Airline Stocks: American Airlines (AAL)
American Airlines Group Inc (NASDAQ:AAL) was flying high before the UAL news brought it back down to earth, having climbed to its best level in a decade in early January. Its latest earnings report was solid, with revenue growth 8% year-over-year and PRASM (passenger revenue per available seat mile, one of the most important metrics for airline companies) increasing 5.8% over the previous quarter.
I like that the stock held above its 50-day moving average (the blue line) as well as important price support at $52 amid the recent selling, and I believe it is now setting up for a bounce off the current levels.
Airline Stocks: Delta Air Lines (DAL)
Delta Air Lines, Inc. (NYSE:DAL) stock is very similar to AAL in that it had traded up to an all-time high last month before falling on the back of United Continental’s announcement. Its latest earnings report was also strong — it beat on both the top and bottom lines — and management showed increased confidence by raising their forward guidance.
The chart may also look familiar. DAL held its ground in the weakness, managing to stick above both price support at $55 and its 50-day moving average, and is now poised to bounce from here
Airline Stocks: Southwest Airlines (LUV)
Southwest Airlines Co (NYSE:LUV) has a different business model than Delta and American Airlines, but again the recent action followed a similar pattern. After hitting an all-time high on the back of solid fourth-quarter numbers, LUV pulled back on the UAL news to price support near $60.
While it has been able to hold that level, it did breach the 50-day moving average at $62.50.
Because Southwest is a discount airline, it could be more affected by price cuts from its larger peers in the future. I do believe it has potential from current prices, though, and I also like that it provides diversification within the broad airline sector.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.