Airline stocks used to be a bit of a joke on Wall Street. But this has changed quite a bit in recent times. Companies have since shored up their spending and have offset their lack of pricing power per unit by adding a bunch of income sources like bag and seat assignment fees. It seems that every time I fly, I almost have to pay for the oxygen I inhale while on the flight.
But lately, the headlines relating to airline stocks have more to do with the Boeing 737 Max model than the companies’ fundamentals. Just this week we learned about more official delays in redeployment estimate dates. Regardless, I want to examine the opportunities in three airline stocks. Delta Air Lines (NYSE:DAL), United Airlines (NASDAQ:UAL) and Southwest Airlines (NYSE:LUV). These stocks will be reacting to headlines now that we are entering a new round of earning reports for the sector starting today.
Case in point, DAL stock this morning fell 3.7% on its earnings report — in spite of a 28% earnings increase and boring guidance. So the short-term reaction to these events is completely binary. We don’t know what management will say nor do we know how investors will react. Year-to-date, LUV stock is in line with the S&P 500 while DAL and UAL are lagging by at least half.
Regardless, DAL, UAL and LUV are stuck in a wide range so all three have opportunity lines to trade.
Airline Stocks to Trade: Delta Air Lines (DAL)
The last time I wrote about DAL stock I cautioned against chasing the upside. DAL at the time had just spiked 20%. Immediately after my note, it corrected 13% and fell back into its breakout neckline. Luckily for Delta bulls, the stock recovered — and more. This is a picture-perfect example as to why investors need to be honest with their trading thesis. Often, we tend to get emotional and make mistakes. So what about the DAL opportunity now?
Fundamentally, nothing has changed for DAL stock. It is still cheap as it sells at a 7.8 trailing price-to-earnings ratio and 0.7 times sales. It also pays a dividend twice that of the 10-year U.S. Treasury yield, so clearly there is not a lot of froth to shed. But that alone doesn’t mean that it can’t fall or that it has to rally from here. Value stocks can become tremendous value traps if traders get the timing wrong.
So for better entry points I use the technicals. In the age where machines do most of the trading in all stock markets, ignoring the technicals is a mistake. Machines rely on technical charts almost exclusively. So I have to at least match them to anticipate the potential mechanical pitfalls of the price action in DAL stock.
The short-term trigger lines for DAL were tight ahead of earnings. But this dip changes things. This morning DAL is falling into a support near $52 per share. This has been a pivotal area for at least a year, so I would be a buyer in this range. Then if they are lucky, the bulls will have an opportunity to use $54.50 as a launching point to try and fill the gap above. But it won’t be easy as there is resistance along the way. DAL stock cannot afford to lose the $51.30 zone — it could trigger a bearish pattern that would target the December lows.
United Airlines (UAL)
UAL stock has done better than DAL in filling its recent gap, but that just means that it has harder work to do in order to add to price from here. This morning it too is falling in sympathy with DAL. United Airlines will report earnings soon so for the short term, the outcome here is also binary. But long term, it is cheap at a 8.8 trailing P/E and 0.5 times price-to-sales. So just like DAL, UAL doesn’t have a lot of fat to trim.
This gives the bulls a good level of conviction to stay long for the long term. Short term, it’s a different story. This UAL stock dip fills an open gap and sets it above a supportive zone. As long as the bulls can keep it above $82 per share, they remain in control. If markets in general hold up through these China talks, UAL can find footing and continue its march to $91. There will be a lot of resistance there and the bulls will need really good reasons to break through.
The stock is range-bound so I’d use the edges of these ranges as my trading limits until either side is broken.
Southwest Airlines (LUV)
LUV stock is the wild child here as it is relatively more expensive than the other two. But it still is cheap in absolute terms with a 12.4 trailing P/E and 1.3 times sales. Like UAL, LUV is also at a tough zone but it is holding up better this morning off the DAL price action. This area has been pivotal for LUV and when price comes back into it from below it tends to stall. So the onus is on the bulls to prove that they can reclaim it. The idea is to break above it and continue using it as a base for higher highs.
Specifically, LUV stock’s recent spike to $54.20 marks it as a target to beat. So that is where I’d probably be interested in buying the rally — if it comes. Otherwise, it is likely to be a place to book profits for those already long. Conversely, $52.50 needs to hold for the short term else it could invite sellers to target the last line of defense near $51.20. Losing that would open the conversation for a very bad scenario. It is important to note that LUV has the most at stake with the 737 situation so extra caution is a good idea.
Generally, it is best to wait for the trigger lines before deploying any short-term trades. If your intention is to own the stock for the long term then I wouldn’t worry about finding the perfect entry point. I would start small now and add to my position to manage my risks as the price unfolds.
Wall Street analysts who cover airline stocks are typically unanimously optimistic in rating DAL, UAL and LUV stocks as a “buy” which renders their opinions almost useless. So I don’t rely on experts for help. I should only use my own judgement from their value and their charts. It is also important to note that there is the effect that the Boeing (NYSE:BA) 737 Max matter is having on airlines. If and when that is resolved, these stocks are likely to enjoy a bump regardless of whether they use the model in question or not. The whole segment tends to trade in unison.
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. Join his live chat room for free here.
