[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.]
Is American Airlines (NASDAQ:AAL) stock headed back to the single-digits? Earlier this month, shares went parabolic. Speculators chomped at the bit to wager on a rapid recovery post-novel coronavirus.
But now, a resurgence in coronavirus cases threatens the bull case for air travel. A quick rebound looks more like a long-shot.
Granted, with the airline boosting its travel schedule, the situation may not be as bad as it seems. 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, even as they increase system-wide capacity back to 40% of prior levels.
Air travel may be trending up. But, it could be years before airline stocks like American start rebounding again. With this in mind, this dwindling enthusiasm for the stocks looks like it was much, too soon.
In short, good reason to take the money and run in case shares continue to fall back. And avoid it completely if you haven’t yet entered a position.
Slow Recovery Means More Bad News for AAL Stock
As lockdowns come to an end, things may be “returning to normal.” But, that doesn’t mean smooth sailing ahead for the U.S. economy. The damage caused by the pandemic could linger on throughout the year. And that’s especially the case for the airline industry.
Investors may have sent shares higher on a breadcrumb of positive news. But now, with coronavirus cases on the rise, expect an even slower recovery for American. Recently, UBS’s Myles Walton reiterated his “sell” rating on the stock. The analyst also trimmed his price target from $10 per share to $9 per share.
Not only is Walton concerned about the carrier’s increased debt load. The current airline price war is another major risk. With little international or business travel demand, carriers are fighting for what’s left of the vacation travel market.
Granted, international travel could come back. Yet, it’s tough to say the same about business travel. Companies now have viable virtual alternatives to in-person meetings and conferences. In other words, pre-pandemic business travel demand may be permanently reduced in the “new normal.”
As this commentator noted, business travelers are profit centers for the legacy airlines. Without this cash cow, it’ll be much harder for the “rapid airline recovery” thesis to play out.
This may explain why industry leaders like Airbus (OTCMKTS:EADSY) CEO Guillaume Faury said it could be “three to five years” before the industry fully recovers. With a long road ahead, it looks even less appealing to buy American stock, as shares continue to price in way too much optimism.
Were Recent Bankruptcy Fears an Overreaction?
In the midst of the pandemic, many saw American as headed towards bankruptcy. In May, Boeing (NYSE:BA) CEO Dave Calhoun predicted an airline bankruptcy in 2020. And, with this carrier having some of the weakest fundamentals out there, it seemed like the one most likely to file for Chapter 11.
Yet, others saw bankruptcy concerns as overblown. As InvestorPlace’s Tom Taulli wrote in April, chances are American Airlines survives coronavirus. Mainly because Washington won’t want to see an airline file for Chapter 11.
In the middle of this bankruptcy talk, the company remained confident. CEO Doug Parker reassured investors, saying “we’re all going to be fine.” But, Parker also said a few years back that the airline would never again go in the red. At the time, it would’ve been easy to doubt his optimistic outlook.
Yet now, even Parker is starting to express some doubt, conceding the long-term outlook remains cloudy. In short, we’re still far from saying clear skies ahead just yet.
Sell Into Strength With AAL Stock
When I last wrote about American Airlines stock, I said it was too late to go short. Yet, now, after shares rose too fast, too soon, it’s possible the stock could retest its single-digit lows. The recent strong performance was mainly due to speculators buying on headlines, as well as short-sellers getting squeezed, as this stock has a heavy amount of short interest.
What’s next for this stock? This formerly-hot airline play could pull back further from here. First, as the shorts exit their positions, demand for shares could taper off. Then, if new developments further hinder the “rapid recovery” thesis, investors buying today out of FOMO could bail as well.
Bottom line: if you own AAL stock now, sell while shares remain in the double-digits. Otherwise, steer clear for now.
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.
