With more travel restrictions likely on the way, American Airlines (NASDAQ:AAL) stock is likely to drop even further in the next week or two.
As a result, now is not the best time to buy shares. But by the beginning of April, the spread of the coronavirus from China will probably decelerate in much of the U.S. and Europe, causing travel restrictions to ease.
By mid-May, as the weather really heats up, fears of air travel are also likely to ease. Meanwhile, it appears that the government will prevent major airlines, including American, from going bankrupt.
At some point in April, the weakness of the shares could, depending on events, provide risk-tolerant investors with a good buying opportunity.
Increasing Travel Restrictions
On Sunday, March 14, President Donald Trump announced that travelers without U.S. citizenship would not be allowed to enter the country if they had recently been to the United Kingdom and Ireland.
The decision came after he announced similar bans on entries to the U.S. of non-citizens who had been to 26 other countries in Europe. Importantly for AAL stock, Trump added that he was “considering restrictions on travel within the United States,” CNN reported.
Research firm Stifel says it believes that the U.S. will eventually restrict travel from Central and South America, and the firm thinks that domestic travel restrictions could also be imposed.
As long as such travel restrictions are still in place, demand for flights will be extremely low. Further, the restrictions will keep investors very bearish toward airline stocks. Thus, with more restrictions likely ahead, it’s not a good time to buy airline stocks.
What’s Up With the Coronavirus?
In China and South Korea, the spread of the coronavirus greatly decelerated after about six weeks. The virus began meaningfully circulating in China at the beginning of January, and its spread began decelerating in mid-February. It arrived in South Korea at the end of January and began greatly decelerating there around mid-March.
So in Western Europe and the U.S., where the virus arrived in earnest at the end of February, the spread will likely greatly ease at the beginning of April.
As I’ve noted in the past, the virus seems to proliferate much more slowly in warmer weather, so the warmer weather coming in a few weeks should also help decelerate the outbreak.
Oh, and warmer weather will play another role, too. Sunny skies should lead to a rebound in demand for air travel, at least in the U.S.
The Government Is Likely to Have the Airlines’ Back
Treasury Secretary Steven Mnuchin has indicated that the administration will look to prevent airlines from going out of business. And Trump and Mnuchin are both pro-business Republicans.
Consequently, investors probably don’t have to worry about the administration taking a page from President Barack Obama’s playbook.
But there is a small chance that Congressional Democrats and Republicans won’t be able to agree on a deal to keep airlines from going under.
The Bottom Line on AAL Stock
With new travel restrictions likely coming soon, now is not a good time to buy American Airlines stock.
Given the above points, shares will probably drop further before the end of March. But the stock could become attractive around the beginning of April, ahead of the likely lifting of travel restrictions and the deceleration of the coronavirus.
However, before buying AAL stock, non-speculative investors should wait for either Congressional approval of financial backing for the airlines industry or assurances from analysts that American Airlines is no longer in any danger of going bankrupt.
As of this writing, Larry Ramer did not own any of the aforementioned securities. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
