American Airlines Stock Is Poised for Liftoff After Crash Landing

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Shares of American Airlines (NYSE:AAL) have certainly struggled to start the year. Although the S&P 500 is off to a flying start in 2019, AAL stock is actually lower so far this year. This follows on the heels of a terrible 2018 when American Airlines stock dropped 35%. While some of the weakness is warranted due to higher fuel costs and slowing growth, the sell off has now gotten to an extreme. Time for AAL to begin to lift off.

American Airlines stock is looking attractive from a fundamental standpoint. The forward P/E multiple is now below 7 and at the lowest valaution levels of the past year. It is also at a discount to the airline industry overall P/E of 9.35. The forward P/E is even lower at only 5. Compare that to the forward P/E for the S&P 500 of 16 and AAL stock looks like a steal at these prices.

AAL stock is also looking good on a technical level. The 9-day RSI reached extremely oversold readings approaching 20 before strengthening. Prior instances when this took place marked significant intermediate term lows in AAL. MACD is also heading higher after reaching an oversold condition and is poised to generate a buy signal on any further strength.

There is major support at the $30 area. AAL stock bounced sharply off this level twice and appears to be ready to do so once again.

AAL stock is normally highly correlated to the NYSE Arca Airline Index but recently that correlation has broken down. American has been a dramatic underperformer over the recent months to the other airlines. I look for that correlation to revert back as it has in the past, with AAL becoming a relative outperformer to the airline group over the coming weeks.

Longer-term investors should look to add AAL stock to their portfolio at current levels given the attractive valuation and technical backdrop. Option traders may want to consider a long term bull call spread, buying the April $30 calls and selling the April $32 calls for a $1 net debit.  Maximum risk on the trade is $100 per spread with maximum gain of $100 per spread as well if AAL closes above $32 at April expiration.

Earnings are due April 25, so the spread will expire before then and avoids any earnings related risk.

Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


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