American Airlines Stock Seems Destined for Single Digits

On Friday, American Airlines (NASDAQ:AAL) rallied along with the rest of U.S. markets, recovering by more than 6%. Shares have been hectic this week. However, as global travel bans multiply, AAL stock appears destined for single digits.

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For this reason, if you feel it’s cheap, I’d hold off buying until there is a better sense the coronavirus has plateaued on a global basis.

Reduced Capacity

Speaking of travel bans, American Airlines announced on the weekend that starting Monday, it is phasing out almost all its long-haul international flights. From Mar. 16 through May 6, American is cutting its international capacity by 75% year over year. Also, it expects to cut its domestic capacity by 20% in April and 30% in May.

The International Air Transport Association (IATA) has forecasted that airlines around the world could lose $113 billion in revenue in 2020 due to the coronavirus. I don’t believe this takes into account the effects of a global recession, which looks increasingly likely as more and more businesses shut their doors to customers.

Further, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has been all over the map. This doesn’t inspire much confidence.

A Change of Heart

On Mar. 9, I suggested investors consider buying AAL stock on coronavirus weakness. Assuming it loses ground today and finishes where it is in pre-market trading, it will be down 27% in just one week.

Just last week, I received several emails from readers critical of my stock picks. Unfortunately, those of us who write about stocks for a living will most likely get trampled in the near term. That’s a fact of life.

However, I can limit the bleeding by recommending investors hold off buying AAL or any other airline stock until there is a little more understanding of where this whole thing is headed.

Having said that, I do think it’s possible that Warren Buffett’s been adding to his airline positions in recent days. We’ll know for sure in May when Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) files its Form 13F-HR.

In the meantime, cash is an excellent place to be.

The Argument For and Against

My InvestorPlace colleague, Luke Lango, stuck his neck out Mar. 12, arguing that buying AAL stock now could pay off in a big way in a few months. With American cutting its schedule to such an extent, I just don’t see how it doesn’t take a big hit to earnings in the next couple of quarters.

I admire Luke’s courage.

In the end, I think our own Ian Bezek’s recommendation that investors sell AAL stock as we enter a bear market holds a lot of weight.

“They [airlines] have high fixed costs, including thousands of unionized employees. And their profit margins are razor-thin even in the best of times,” Bezek wrote Mar. 12. “If, say 10% of folks decide not to travel for a year due to the virus, it could easily flip the whole industry into a net loss-making position.”

That’s a compelling argument against owning AAL stock.

The Bottom Line on AAL Stock

My argument for buying American’s stock was strictly a contrarian play for risk-takers only based on the fact it had already been beaten down so badly. Now that a week’s past and it’s clear this thing is not going away anytime soon, I’m not even sure risk-takers should apply.

The smart play at this point is to wait for it to fall into single digits. The Trump administration may provide some financial assistance to get the airlines through the darkest days. That could give a lift.

An even smarter play if you’re considering AAL stock is to buy Berkshire stock in its place. You get a diversified portfolio of public and private investments, including American Airlines.

I wish I could be more committed to buying its stock at this point. I just don’t see it taking off until the travel bans are lifted.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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