I am not a fan of writing about downside potential, but there is temporary risk to Delta Air Lines (NYSE:DAL) stock up here. Before you label me a hater, today’s write up is not a diss about the company itself or its prospects. This is merely a call for caution that is more technically based than fundamental.
Yesterday, DAL stock reported a strong earnings report and the stock appropriately rallied on the headline. The stock so far is trading in lock step with the S&P 500 as it nears its all-time highs from November. Year-to-date, DAL stock is up a respectable 17%.
Fundamentally, the company seems to be doing great, and they promised even better things to come as they raised their forward guidance for 2019. Yet, the stock is cheap, as it only sells at a 8x forward price to earnings ratio. And it also pays a 2.4% dividend to sweeten the pot.
Dealing With DAL Stock
So why am I cautious about the stock up here? There are some worrisome technical aspects to consider.
Although it ended yesterday up, the 3% spike faded in spite of the awesome report. Their management media appearance sounded super confident yet it couldn’t retain its highs of the day. This by itself is not a deal killer, but there is more.
Recently, Delta stock broke out from $52 per share in a big way. So the fast rise in the stock left big open gaps below that could become magnets for short-term trading. While not every gap on a chart gets filled, most of them do. This one is prominent enough that it will attract attention from short sellers.
If DAL loses $56.50 per share, it could invite momentum sellers to try and target $53 per share. While this is not a forecast, it is a scenario prospective buyers of the stock should know.
Wall Street analysts who cover the stock are almost unanimous in rating DAL stock a buy. This leaves no room for improvement and increases the odds of a surprise downgrade. I get uncomfortable when everyone agrees on the same thing because this is when change usually comes. Again, this is not an imminent threat, but it’s looming. In fact, just this week, Credit Suisse raised its price target on Delta — and it probably won’t be the only one to do so.
We also have outside factors meddling with the airline stocks. This time, it’s about Boeing (NYSE:BA). The grounding of the 737 Max and its production halt has a big impact on airlines. Delta has none of those, so it won’t benefit from a relief pop once that situation is resolved. So DAL stock could lose bids to other airlines who are currently under pressure from BA’s woes.
In summary, although I like what the Delta team is doing and how strong the stock it, this is not an obvious time to initiate a new long position. Long term, this is not a worry, so those long it already with profits can stay in them and manage those positions according to their parameters.
After all, when management tells us that demand for Delta’s products has never been stronger, we believe them. This is the ultimate statement of confidence that they are executing well on their plans. Otherwise they’d be offering excuses to explain away what’s not working.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.