Global markets are in the throes of the mother of all corrections. Stocks have never fallen so fast, or from such heights. And the airline industry is the poster child for this shake up of global economies. Airline stocks like American Airlines (NYSE:AAL) who were profitable just a few weeks ago, now are asking for handouts just to continue existing.
Through no fault of its own, AAL stock finds itself at 2008 levels , a dizzying 70% down from recent highs. But it isn’t alone: Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL) are in a similar jam as travel around the globe freezes. Hardly anyone is flying now, so AAL’s income statement is essentially useless beyond the negative journal entries.
But unlike in 2008, this is a self-imposed stop to travel that will be lifted soon. The freeze isn’t due to demand collapse but rather a halt by choice of quarantine. But you’ll need a stomach of steel to withstand the selling pressure that these stocks have been and will be suffering this year.
The industry is suffering tremendous losses as their planes are grounded while the fixed operating costs pile up. Consequently, industry competitors are considering consolidating flights among airlines. Under normal circumstances this would be illegal but the authorities will look the other way if it comes to it.
What investors want to know now is if this is an opportunity to buy into AAL stock. Looking long-term, yes. People will have to fly again, so buying this stock near 2008 levels is sane.
AAL Stock Is Worthy Of A Bailout If Needed
The political debate is now over whether or not to bailout airlines. Their problems really started last year with the grounding of the Boeing’s (NYSE:BA) 737 Max model. American had already sidelined its Max models through June but this is an added wrinkle that extends to most of its fleet. So AAL stock will remain hobbled for months or until the virus goes into remission.
These are great American companies and it would be shameful if the government will let them fail. While there is no imminent risk of that, the current situation doesn’t look like it’s going to end anytime soon.
So there better be steps taken to avert the potential disaster. We don’t need a Lehman moment for the airline industry, and I think the authorities learned their lesson in 2008. Our government has already showed its commitment to keeping the economy going. They already committed two trillion dollars in stimulus and will not stop short of helping the airlines as well if it comes to it.
It is Wrong To Give Up On American Airlines
There is speculation that the bailout could be tied to equity ownership that would punish stock holders. But the more realistic option is that the government would impose financial rules such as banning buy-backs and dividends, rather than taking a stake in the company itself. This is all speculative, but it is necessary to consider all possibilities when trying to catch these falling machete stocks.
The long-term bullish thesis right now is almost foolproof provided AAL stock survives this test and avoids going to zero via government action. Otherwise, patience will pay over time as the stock recovers to set new all-time highs.
Since volatility is still so high, conviction in any investment ought to be moderate. Staking full-size investments now is reckless behavior. Leaving room to add to your position later is the best way to manage the position. Alternately, rather than buying shares, investors could sell put options to go long AAL stock without any out-of-pocket expenses.
Technically and for the short-term, if the bulls can beat $40 per share, they can trigger a $12 buy signal. There will be resistance levels along the way, but markets are eager to push stocks higher.
Fundamentally, it’s hard to argue that shares are expensive here. AAL stock is under 4 price-to-earnings ratio and selling at a fifth of its sales. Albeit the metrics are wonky since there are no sales flowing through the P&L.
Nevertheless, AAL stock is not bloated here. The near-term future for American Airlines might be murky but eventually they will fly again.
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.
