You won’t find an upbeat Oracle of Omaha taking a seat next to you, but if investors are looking for a stock well-positioned to take flight into 2021 and beyond, Delta Airlines (NYSE:DAL) should be on your radar. Let’s look at what’s happening off and on the DAL stock chart, plus one favored insurance policy to get investors to their destination safely. Let me explain.
It’s not exactly news Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) exited Delta and its entire airline stake, fearing the world has permanently changed due to the novel coronavirus. Along with peers Southwest (NYSE:LUV), American Airlines (NASDAQ:AAL), and United Airlines (NASDAQ:UAL), the investment was closed back in April as it could no longer be justified by the famed value investor.
And last month’s earnings results in Delta certainly appeared to support the Oracle’s apocalyptic warning.
The State of the Airline Sector
With the Covid-19 pandemic persisting in the U.S. during Delta’s second quarter, the airliner lost boatloads more money than Wall Street analysts were braced for. Net income fell by nearly 500% to a staggering loss of $5.72 billion, while sales for the three periods were off by 88% from 2019.
It’s also true conditions are looking up, albeit ever so slowly for the airline industry and Delta.
For the month of June, airline passenger traffic was off by 80%. But a headcount of 16.3 million was a huge improvement from April’s crushingly low statistic of 3 million. The tally also grew nearly two-fold over the business seen in May.
More recently, this week the Transportation Security Administration (TSA) announced it screened more than 800,000 people nationwide, further indicating an improving trend for airliners.
DAL Stock Monthly Price Chart
Source: Charts by TradingView
The monthly DAL price chart shows a stock which has put together a deep corrective bottoming candle. It’s far from unique. The broader market’s March low tied to Covid-19 provided similar opportunities in the majority of publicly-traded stocks. There were thousands and investors had their pick of the litter.
But unlike Apple (NASDAQ:AAPL) and the Home Depot’s (NYSE:HD) of the world, an advantaged coronavirus play like Zoom Video (NASDAQ:ZM) or Tesla’s (NASDAQ:TSLA) almost inconceivable rally, Delta didn’t bottom until May. Further, while shares have gained some ground above the monthly hammer’s high of $27.85, when accounting for Delta’s volatile price swings, a return of about 5% barely made good on the pattern’s bullish promise.
Looking forward, the culmination of all the ups and downs over the past couple months, coupled with shares never coming close to failing the bottoming pattern, does have us positive on the airliner and worthy of long stock exposure. Sorry, Warren.
To be fair, the price charts of DAL, UAL, LUV, AAL, and others are a dime a dozen. And if we’re to consider roughly 700 global airline carriers, half of those outfits could go bankrupt, according to a report from the International Air Transport Association released at the tail end of June.
It stands to reason whatever hopeful signs we’re seeing today is a coin flip away from a much uglier crash in shareholder value for many airline operators. Still, Delta does stand out in other ways.
It’s no secret that among the largest airline carriers, Delta is the strongest positioned to weather the coronavirus. Citigroup’s Stephen Trent said as much this week. An upbeat note stressed DAL’s strong balance sheet, attractive loyalty/credit card program, and the airliner’s continued commitment to putting passengers’ safety first with its strict middle seat protocol. Based on a forward price multiple of 8x earnings, the analyst set Delta’s 12-month price target at $38.
So, how should today’s investors gain exposure to Delta? With a bit more clarity supporting optimism for DAL’s longer-term prospects, I like the idea of buying long stock hedged with a slightly riskier variation of a collar strategy.
Along with a stock purchase, the spread combination I have in mind sells an out-of-the-money call and purchases a bear put vertical. The total position amounts to having a partial flight insurance policy while optimistically looking for shares to rally towards a destination where the short call resides. One favored variation of this strategy is selling the December $38 call, purchasing the December $26 / $20 bear put spread, and buying shares for even money or a slight discount to buying Delta stock outright.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. Investment accounts under management do not own any securities mentioned in this article. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.