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Copa Holdings Won’t Outperform Airlines for Long

My indicators are giving strong sell signals this week, a downgrade from last week’s neutral readings, so I think it’s time for a bearish play on Copa Holdings, S.A. (NYSE:CPA), the parent company of Copa Airlines.

Market breadth continues to weaken, as most of the heavy lifting is coming from just a handful of large- and mega-cap tech stocks. Energy, industrial, financial and airline stocks, on the other hand, are still much closer to their recent lows than their recent highs.

If you look at the chart of the U.S. Global Jets ETF (NYSEARCA:JETS) you can see just how dire the situation is.

Daily Chart of U.S. Global Jets ETF (JETS) — Chart Source: TradingView

The JETS, which is made up of passenger airlines, aircraft manufacturers, airports and terminal services companies, is underperforming the S&P 500 even after the mixed action this week.

Airlines are lagging because hardly anyone is flying, and while CPA is outperforming the segment now, likely because it serves Colombia and Panama, that could change as investors factor in the effect of the outbreak.

Consumers Won’t Come Back Quickly

CPA outlined the challenges it faces in a recent press release, and it isn’t all that different from the problems U.S. airlines are facing. The company had to ground all flights, and it won’t resume operations until June 1.

When it does resume, its operations will be approximately 10% of their pre-COVID-19 size because the company doesn’t think there will be enough demand to resume all at once. Its Panama segment only expects to reach 40% of its usual flights by December.

People don’t want to travel, and that isn’t going to change just because you look at a different hemisphere.

CPA may outperform the U.S. airlines in JETS for now, but eventually it will start to drop.

CPA’s Trend is Weak

If you look at the chart below, you can see that CPA is starting to follow its 50-day moving average lower. In fact, both its 50-day and 200-day moving averages are in a downtrend.

Daily Chart of Copa Holdings, S.A. (CPA) — Chart Source: TradingView

The company’s recent earnings surprise was on adjusted earnings per share numbers according to Zacks Research. Those adjusted numbers were still down over 12% from last year, and this slow return to normal operations isn’t going to help over the coming quarters.

To keep the cost of this put trade low, I am recommending a farther out of the money option. The $25 strike price is just above the stock’s recent low.

I think the stock will move to retest support at around $34, possibly after rising a little next week. If it breaks below that level, traders may be able to collect a profit on this put option.

Buy to open the Copa Holdings, S.A. (CPA) July 17th $25 Puts (CPA 200717P00025000) at $1.60 or lower.


InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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