Why Millennials Are Wrong About American Airlines

As the calendar gets ready to turn to May, talk of a staged reopening of the U.S. economy is gaining momentum. However, American Airlines (NYSE:AAL), along with all airlines, remains grounded. And that means AAL stock is lying on its back as well.

Why Millennials Are Wrong About American Airlines
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Like all airline stocks, AAL took a steep drop in February. However, the stock rebounded a bit on news that the airline industry would receive bailout funds from the federal government’s CARES Act. That bump was short lived. The stock has fallen over 30% since March 26.

But that begs the question, is AAL stock too cheap to ignore? My InvestorPlace colleague Larry Ramer made a case for buying shares as the warmer weather approaches. And Nicolas Chahine offered the technical argument.

That message seems to be resonating with at least some investors. According to Robinhood, American Airlines was the sixth-most-bought stock on the app in the last month. This isn’t surprising. Robinhood is popular among millennial investors. But is this an example of investors buying on the news? Or could millennial investors be signaling their vision of a post-coronavirus economy?

The Leaders of the Experience Economy May Be Sending a Signal

As recently as mid-March, millennials were still taking to the air. Despite the announcement that the novel coronavirus was being characterized as a pandemic, millennials saw it as an opportunity to travel at cheap prices.

Millennials are the leaders of what is being termed the “experience economy.” As real estate agents continue to lament, this is a generation that is placing a higher value on experiences over things like homes. A 2016 survey by JPMorgan Chase (NYSE:JPM) emphasized that millennials will pay more for travel, entertainment and dining compared to their parents and grandparents.

And a Travelport survey shows that millennials take more vacation days on average, 35, than any other generation. They also are more willing to spend on a vacation.

It’s impossible to know for certain how individual consumers will respond once they are given the opportunity to fly. But it’s worth noting that demand hasn’t waned because of the economy, but rather by executive order. We can’t speculate on what demand may have been. But assuming that millennials don’t want to lose their investment dollars, we may be able to speculate on what’s to come.

The Right Sector But the Wrong Stock

Millennial investors may be signaling their intention to get back on airplanes as soon as possible. If that’s the case — and that remains a big if — it’s possible for millennials to be investing in the right sector, but the wrong stock.

A very prevalent mistake made by less-experienced investors is to “buy the dip.” This philosophy is often paired with the Warren Buffett advice to be greedy when others are fearful. However, even Buffett’s private equity firm Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has been bailing on airline stocks.

At the time of this article, it wasn’t clear that Berkshire had sold shares of AAL stock. Nor was it clear that Buffett himself had personally directed Berkshire to sell the airline stock.

But this goes to show that while millennials may be onto something by going long on airline stocks, they may be betting on the wrong airline.

The Fundamentals Are Working Against AAL Stock

The airline industry has received a lifeline from the federal government as a part of one of the many stimulus packages. As time goes on, we’ll have a better understanding of what the real economic impact of the novel coronavirus pandemic will be. But for now, investors should have confidence that the major airlines will live to fly another day.

And the most well-run of these airlines may even have a profitable future. But as I wrote earlier this month, American Airlines had financial problems before the pandemic broke out. The company entered the year with $29.6 billion of adjusted net debt which equates to 65% of its 2019 revenue. That was far higher than other competitors like Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL).

The bottom line then and now is the same. American was the airline that could least afford this pandemic. And that’s why, while the company will be putting planes in the air, you should take a pass on AAL stock.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/millennials-wrong-about-aal-stock/.

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