The good news is that airline stocks are soaring this week. Just yesterday JetBlue (NASDAQ:JBLU) and most of its cohort rallied 15%. American Airlines (NASDAQ:AAL) tipped the scales with a whopping 41% spike in just one day! JBLU stock is up another 5%-plus today — which is actually DOWN from the 10% gains it had managed this morning.
I don’t care how good the news was, moves this big make impossible for me to chase in good conscience. Today’s write up is a buy-the-dip note — but not on this move.
This sounds bearish, but it is not a call to sell the rip either. In fact, a few weeks ago when investors were selling JBLU stock down 8% in mere hours I was writing about taking the long side of that action. Those trades are all green now with a quick double.
It is important to celebrate the improvements this week, but it is more important to properly frame them. For perspective, the airline stocks are still down 30% to 60% this year, even after these spikes. The reason investors are flocking into them now is on the news that they added significantly more June flights than in May, and more for July. But in all fairness, this would still be 60% below last year’s levels.
Currently air traffic is still down almost 90%, so anything above zero sounds great. My concern is that the celebration was excessive relative to the improvement.
Management during tough times matters, and JetBlue got creative while fighting for its life. They even sold rewards points to raise $150 million in cash. This team gets kudos points for thinking outside the box. This should give investors confidence that they are likely to successfully navigate the next tests.
JBLU Stock Has a Battle Ahead
Most of the easy work is done. Into yesterday’s high, JBLU stock had doubled from the crash low. This is also coming into the 50% recovery of the whole correction, which is where normally we find sellers lurking.
Initiating new longs here means leaving the trade vulnerable to starting on a sour note. But it all depends on the investor’s individual time frames.
Those who are looking to own airlines for the long term are probably comfortable sitting through the potential resistance zones. But the rest of us should expect a tougher slog from here than getting to here.
Even the long-term believers should also recognize that the recovery doesn’t mean back to 100% health. The new normal is not going to be like the old one. Capacity restrictions will severely hamper sales. Moreover costs will rise to comply with new rules and regulations. The airlines will impose some on themselves but more will come from federal agencies.
Fear Will Certainly Be a Factor
In addition to dealing with the logistics of reopening the flights, management will need to handle the human element. People are scared of Covid-19, so they will not be flying nearly as often as before. Some will likely refuse to fly at all before we get a vaccine.
It’s also true that there is the chance we won’t ever get a vaccine. So far, there hasn’t been one successful vaccine on any coronavirus. Flying will become a necessity not a pleasure, so demand is not likely to snap back into pre-crisis levels. the price will also probably need to rise to cover the new costs and habits.
This is all to say that the existing assumptions for the airline industry from before February have changed forever. They will need to prove that they can still succeed as well as they did before — and they were not superstars in any case. This all adds up to a whole bunch of uncertainties on a great many fronts. JetBlue will have to fix the top and bottom line problems to re-tweak their company performances. Consequently, the current fundamental metrics are useless. Very little of what was will continue the same going forward.
Trading JetBlue Will be Tricky Against March Levels
The price action in JBLU stock on March 20 will matter. This was a point of contention then, so it will be again here. There should be sellers from $13 through $15 per share. But this won’t be the end of the rally forever, it will be a place to stall.
This is important so that the recovery wouldn’t be frothy. A house of cards is easy to destroy, and it’s in the best interest of the bulls to retreat a little to build a better base.
The best trades come when investor sentiment is near its worst levels. No, this is not to say that we should pick the bottoms but the best opportunities that present themselves at the worst times and this is not one of them.
I shared my note on April 22 when it wasn’t an obvious entry point, and it paid well. Today doesn’t feel like that time.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
