Wait for Another Pullback Before Buying American Airlines

A 'wait-and-see' approach may be the best way to play AAL stock

[Editor’s Note: “Wait For Another Pullback Before Buying AAL Stock” was originally published April 22, 2020. It is regularly updated to include the most relevant information.]

Wait For Another Pullback Before Buying American Airlines (AAL) Stock
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Novel coronavirus headwinds continue for American Airlines (NASDAQ:AAL). Since the outbreak first hit China, AAL stock has cratered from around $30 per share to just above $10 per share. But, could a low share price mean a solid “bottom-fishing” opportunity?

It depends. Airline stocks have moved higher in recent days, on optimism for a post-pandemic recovery. But, keep in mind the many fleas on this legacy carrier. Even before the pandemic affected air travel.

As I previously discussed, American Airlines already had a heavy debt load and other operating issues.

And despite the company receiving $5.8 billion in payroll support from the $2 trillion CARES Act stimulus package, they could burn through billions more as air travel volumes remain depressed.

The worst of the coronavirus in America may already be over. But, it could be years before airline stocks like American start rebounding again. With this in mind, today’s prices may not be enough to justify a buy in the near-term.

Yet, that doesn’t completely rule out American Airlines as a buy at lower prices. Let’s dive in, and see why a “wait-and-see” approach may be the best way to play this hard-hit airline stock.

Slow Recovery Means More Bad News for AAL Stock

Things may be starting to “return to normal.” But, don’t take that to mean smooth sailing ahead for the U.S. economy. The damage caused by the pandemic and its associated shutdowns could linger on throughout the year. And that’s especially the case for the airline industry.

There are many reasons why the stimulus package is far from being a “silver bullet” for American and the other airlines. Firstly, airlines continue to burn through cash at a rapid clip. This airline alone anticipates losing $70 million a day through June. In other words, over $2 billion a month, or $6 billion a quarter. Losses are expected to come down this summer, but will still be in the billions per month.

Also, don’t expect travelers to return to the skies right away. As our own Louis Navellier recently pointed out, the airline industry’s “new normal” doesn’t look too pretty. Social distancing and safety efforts are going to make air travel unattractive for quite some time.

This may explain why industry leaders like Airbus (OTCMKTS:EADSY) CEO Guillaume Faury say it could be “three to five years” before the industry recovers. With a long road to recovery, it’s tough to be confident in the near-term prospects for American.

Darkest Before the Dawn?

Things sound bleak for American Airlines. Yet, with shares bouncing back from single-digit to above $10 per share, we may be reaching a bottom. Granted, investors who bought on prior “dead cat bounces” in March and April lost out when shares continued to trend lower.

But, if shares retest prices in the single-digits, are the odds on your side? As InvestorPlace’s Tom Taulli wrote last month, it’s likely American Airlines survives coronavirus. Mainly because Washington won’t want to see an airline file for Chapter 11.

Yet, with Boeing (NYSE:BA) CEO Dave Calhoun predicting an airline bankruptcy in 2020, this risk should be top of mind. And considering American’s weak financials, this airline could be the leading candidate.

What does the airline itself say? Recently, CEO Doug Parker reassured investors, saying “we’re all going to be fine.” But, considering Parker said a few years back that the airline would never again go in the red, it’s tough to confident in his forecast.

In short, the current darkness may not be signalling that dawn is near. And at today’s valuation, risk of bankruptcy (which would wipe out shareholders) may not be fully priced into the stock.

Wait-and-See Is the Key With AAL Stock

When I last wrote about American Airlines stock, I said it was too early to buy but too late to go short. But now, I’m a bit more bearish. With Warren Buffett recently selling his airline stocks, and aviation industry leaders calling for continued challenges, shares may head lower.

On the other hand, airline stocks have trended higher, as speculators bet on a swift recovery. Yet, this excitement could quickly change course if reality does not match expectations.

That’s not to say the legacy carrier is going bankrupt, as some have hinted. But, it may be best to buy only when a rebound isn’t priced into the stock.

Bottom line: wait for American Airlines shares to head lower before entering a position. If shares fall back into the single-digits, the potential price appreciation could more than make up for the risk.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/potential-downside-dont-jump-aal-stock/.

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