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There’s Little Reason for Optimism for American Airlines

American Airlines (NASDAQ:AAL) stock remains down nearly 60% for the year. But to be clear, it could be a lot worse. And that is creating some sentiment that AAL stock could be a contrarian bet.

American Airlines plane on ramp in Chicago Airport.
Source: GagliardiPhotography / Shutterstock.com

I don’t think that’s an apt assessment of the situation. The definition of a contrarian investor is that they buy when others are selling and vice versa.

However, when it comes to American Airlines, investors are buying the stock. In fact, all of the big four U.S. airlines have bounced off May lows. United Airlines (NASDAQ:UAL) is up nearly 70%, Delta Air Lines (NYSE:DAL) is up nearly 40%, and Southwest Airlines (NYSE:LUV) is also up nearly 40%.

AAL stock as of this writing is also up nearly 40%. This tells me that investors aren’t ignoring AAL stock, even though that it might be a good idea to do so.

When you look at airline stocks over the last 12 months, a similar picture emerges. American, United, and Delta are down 56%, 61%, and 54% respectively. Only Southwest’s stock at price is less than 50% off its price of 12 months ago.

As a result, investors may believe that investors find no clear winner, or loser, among the airline stocks. Investors are clearly not blaming any one airline for the pandemic. But that doesn’t mean they agree every airline will come out of this well.

AAL Stock Was a Laggard in a Bull Market

Airline stocks were up briefly in early August because airline traffic had topped the 700,000 mark for five consecutive days. While nobody ever thought 25% of year-over-year traffic would be reason to celebrate, airlines will take what they can get.

This got me thinking about how the big four were performing at this time last year. AAL stock was the only one not to be positive for 2019. This is a reminder that while investors may feel American’s stock dropped too far, they are likely to be less bullish on the way back up.

Recovery Will Take Some Time

Despite the sell-off in March, airline stocks didn’t bottom out until May 15. This was due to two factors. The first was largely intangible. On April 22, Delta CEO Ed Bastian told his employees it could be two or three years before the industry recovers from the novel coronavirus.

While it seems obvious that it’s not going to happen now, at the time many investors were holding out hope for a V-shaped recovery. The case was understandable. First, cases of Covid-19 would largely disappear in the summer (just as America was reopening). Then if the virus resurfaced in the fall, we would be that much closer to having a vaccine or antibody treatment.

But by the time we got to late April, investors were beginning to realize that we were really dealing with a different kind of virus. And that it was going to be a difficult summer for the airlines.

Were They Who Buffett Thought They Were?

The second factor was more tangible. In April, Warren Buffett announced he was dumping all of his airline stocks. In doing so, Buffett gave a dour outlook on the future of the industry. Buffett said of his decision that Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) was not going to fund a company that they believed would be chewing up money in the future.

And shortly after Buffett’s announcement, a heavily indebted American took on additional debt. The company raised $3.5 billion in new financing, putting its total debt at the end of the first quarter to $34 billion. The company said the funding was to ensure its solvency throughout the pandemic.

And that seems to be working. The company is managing to slow the rate at which it was burning cash. This is making bankruptcy less of a possibility. However my InvestorPlace colleague Thomas Niel advises you not to discount a Chapter 11 filing.

The Worst of a Bad Lot

These are troubled times for airlines. It seems that some Americans are stiffening their upper lip and creating their own version of normal. Some of them may even decide they will get on an airplane. But those individuals will be exceptions. American Airlines high debt load was weighing it down before the pandemic. A larger debt load will continue to hamper AAL stock as better days appear.

However, the longer those days take to get here the more likely another bankruptcy may become. For that reason alone, you can find better options if you want to speculate on airline stocks.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/aal-stock-little-optimism/.

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