Airline stocks historically have not had the best of reputations on Wall Street. For decades, they could not sustain their winning streaks for long. The perception was that they always found new ways of messing up, even while winning.
But those days are over, because now when we fly, we get very few freebies. Passengers sometimes even have to pay extra to reserve a seat that they’ve already paid for. Checking luggage is also no longer always free.
The bottom line is that airline stocks have cultivated taxing habits to enhance their bottom lines on a sustainable basis.
Yet, the write-up today is to caution against going long these three airline stocks right now. This is not a knock against the companies themselves. In fact, about a month ago, I wrote about going long these very same stocks — and the trades paid well quickly. But now the stocks of United Airlines (NASDAQ:UAL), Delta Airlines (NYSE:DAL) and Southwest Airlines (NYSE:LUV) will likely offer up better entry opportunities than current levels.
Airline Stocks to Trade: United Airlines (UAL)
United Airlines stock is cheap. It trades at an under 9x price-to-earnings ratio and 0.5 times sales. There is little fat to trim off this bone. However, this doesn’t mean that the stock cannot fall.
Since the bulls have fresh profits in hand, now is the best time to sit back and wait for another entry point before a new rally begins. Again, this is nothing against the company’s fundamentals. As with all three opinions today, these are trading opportunities around the actual price action, not the value of the company.
UAL stock chart looks vulnerable at these levels. A better entry point would be closer to $89 per share. So I would either buy the dip if and when it happens, or I would wait for a technical breakout to chase.
If the United Airlines bulls can rise above $95 per share then they would invite momentum buyers. The ensuing rally would then target triple digits. But it is best to wait for a confirmation of the breakout.
Delta Airlines (DAL)
DAL stock rallied 15% off its earnings report. But the bad news is that it has set another lower high since its 52-week top of around $63 per share. Since it also has been setting higher lows, the range of the stock is tightening into a point. This usually gathers energy that would need to let loose. The direction of the move has yet to be determined, but we do know the lines that matter for it.
The Delta bulls need to hold $56 and then $55 per share, or else they risk handing the momentum over back to the sellers.
There are a lot of fresh profits at risk. Easy money comes fast, but it also goes away at the drop of a hat. Conversely, the upside opportunity lies just above $58.50 per share. If the buyers can close above that level then they can continue the rally and breakout of the descending trend line of lower highs. If so, then the measured move would target the July highs. There will be heavy resistance near $60.50 per share.
Southwest Airlines (LUV)
Of the three companies here, LUV stock is the most expensive. It trades at a 13x P/E ratio which is 50% higher than either DAL or UAL. But in this case, the bulls got their money’s worth. Year-to-date, LUV is up 23%, which is in line with the S&P 500 and about double the performance of the other two airline stocks.
Nevertheless, this doesn’t make Southwest stock a more attractive long investment here. Its chart also looks vulnerable to dips. A better entry point than now would be closer to $55 per share. It is best to either buy the dip to $55, or wait for a technical breakout to chase above $58.80.
It is important to note that LUV stock is now inside a region that has been in contention for years. A breakout from those is not usually easy, but it would make for a good catalyst. If the bulls overcome the resistance, they can target a 10% rally from there.
The general markets are near all-time highs, so conviction in any stock should be tempered. It won’t take much to cause a correction from these altitudes, especially since Wall Street is still suffering from headline whiplash. Patience is a virtue in these airline stocks charts.
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.
