Don’t Buy United Airlines Stock Out of ‘FOMO’

With an airline recovery years off, UAL stock could retest past lows before it heads higher

[Editor’s note: “Wait for a Pullback Before Buying United Airlines (UAL) Stock” was originally published on April 9. It is regularly updated to include the most relevant information.]

UAL Stock: Wait for a Pullback Before Buying United
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United Airlines (NASDAQ:UAL) stock has pulled back, after going parabolic earlier this month. Does that make shares a buy? Probably not right now. The legacy carrier isn’t out of the woods yet.

Wall Street as of late was banking on a rapid recovery for airlines. But, as fears of a second novel coronavirus wave spread, UAL stock could continue to head lower, as its done in recent days.

The $2 trillion CARES Act and an upcoming debt offering may help United shore up losses. But if air travel remains depressed for years, expect the airline to need even more capital to stay afloat.

On the other hand, consider United a buy if shares continue to pull back. The stock could retest past lows, as recent bad news scares off speculators. But long-term, shares could continue climbing back to their pre-pandemic prices.

So, what’s the verdict? Let’s dive in, and see whether you should give into the “FOMO” (fear of missing itself) and buy now, or take a wait-and-see approach.

Up in the Air for UAL Stock

Main street may be slowly recovering from the coronavirus. But if you go by the recent stock market recovery, you’d think the pandemic was long over. Since late March, the S&P 500 (NYSEARCA:SPY) has rebounded about 37% from its lows.

Yet, for airline stocks like United, it’s been more a roller coaster ride. Since March’s pandemic-driven selloff, the airline’s shares bounced up and down, rallying one week, but pulling back the next. But, as investors piled into airline names earlier this month, shares took off like a rocket.

However, after briefly doubling off their lows, the recent investor fears have pushed United’s stock back to prices around $33 per share.

In short, it’s still up in the air whether we’ll soon see a “return to normal.” Analysts such as Citigroup’s Stephen Trent have been bullish on the stock. Previously, Trent gave shares a price target of $38 per share. Yet the analyst’s forecast didn’t call for the company’s shares to recover so much, so soon. Trent’s price target factored in a slow recovery, with estimated 2022 revenues still 14% below 2019 levels.

With this in mind, it’s crystal-clear that speculation, not underlying fundamentals, drove the early-June airline rally. Investors who bought prior to this enthusiasm may have realized quick profits. But those who bought into the rally may be in for a world of hurt. Especially if an airline comeback winds up taking as long as some experts previously predicted.

A Long Road to Recovery

It could take up to five years for the airline industry to bounce back. And on that time horizon, a lot of things could get worse for legacy carriers like United. As our Louis Navellier wrote Jun 15, tough times could continue for airlines until a coronavirus vaccine becomes available.

That’s not to say an airline recovery is destined to be slow and painful. This airline has joined American Airlines (NASDAQ:AAL) in announcing a fast increase in flights reopening through the summer.  But, as United itself has admitted, demand is “still a long way from where it was.” In short, a swift rebound remains a long shot.

So, what does mean in terms of buying or selling United at today’s prices? Shorting the stock remains precarious. Even as shares fall back from the now-past epic rally. It’s hard to tell whether a pullback will continue, or if another massive share price bounce-back is just around the corner.

Yet, that doesn’t mean today’s the time to buy United Airlines stock. Considering the potential length of a recovery, the stock right now may still not reflect the level of risk that remains. With this in mind, a “wait-and-see” approach may be the best move.

Bottom Line: Wait This One Out

In recent weeks, investors jumped back into hard-hit stocks like the airlines. But, as speculators cool off on this sector, the easy money has already been made. For now, near-term price action remains up in the air. Chances are the industry doesn’t “return to normal” anytime soon. That could mean UAL shares continue to fall from here.

So, what’s the play? With plenty of time to enter a position, a “wait-and-see” approach may be the best way to play United Airlines stock. Wait to see if a “second wave” causes the airline’s financial problems to accelerate. Or, if Wall Street’s prior V-shaped forecast remains in motion. You may miss out on some of the gains. But you’ll minimize a lot of the risk.

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


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/ual-stock-wait-and-see-dont-buy-now/.

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