August has started on a positive note for shareholders in many U.S.-based airlines like Delta Air Lines (NYSE:DAL). Since finishing July at $24.97, DAL stock is up around 20%, flirting with $30. Now, investors are wondering what may be next for the shares.
Airline stocks are typically cyclical, underperforming when the economy contracts. Since early 2020, the environment in which airlines operate have been extremely challenging. Due to the novel coronavirus pandemic, air travel both stateside and globally have dropped significantly. According to IATA, in the early part of the year, the global airline industry was severely hit with an average demand decrease of over 60%.
Hope springs eternal and investors believe that the administration is committed to supporting airlines. Therefore, in the coming days, I believe the positive momentum in DAL stock may push the shares toward $35, a level that is likely to become a major resistance. Today, I’ll discuss how current and potential shareholders may consider taking advantage of such a move. Let’s take a closer look.
How Q2 Results Came
Recent checkpoint travel numbers released by the Transportation Security Administration (TSA) reveal important details. On Aug. 9, “total traveler throughput” as reported by the TSA was 831,789, down from 2,647,897 a year ago. Nonetheless, August 2020 numbers show a notable improvement from previous months. For example, comparable 2020 numbers of July 9, June 9, and May 9 were 709,653, 338,382, and 169,580 respectively.
The investing community was ready for poor Q2 results from airlines and Delta’s numbers were quite dismal. On July 14, the group reported adjusted pre-tax loss of $3.9 billion and adjusted loss per share of $4.43. This loss excluded $3.2 billion of “items directly related to the impact of COVID-19 and the company’s response, including fleet-related restructuring charges, write-downs related to certain of Delta’s equity investments, and the benefit of the CARES Act grant recognized in the quarter.”
Its adjusted revenue of $1.2 billion declined 91% versus prior year on system capacity reduction of 85% compared to the prior year.
Over the past several months, management has been taking steps to strengthen the balance sheet to make sure the airline has enough funds to survive this somewhat open-ended crisis. As a result, the airline ended the quarter with $15.7 billion of liquidity. Although the daily cash burn remains at $27 million, management aims to achieve break-even cash burn by year end.
Market participants are hopeful that Delta’s business most likely bottomed during Q2 and is recovering, albeit slowly. However, CEO Ed Bastian’s reminds investors what a difficult year 2020 has been: “Given the combined effects of the pandemic and associated financial impact on the global economy, we continue to believe that it will be more than two years before we see a sustainable recovery.”
Recent Price Action
DAL stock’s 52-week price range has been between $19 and $63 per share. On June 5, it saw a recent high of $37.24. As I write, the price is hovering around $30. $1,000 invested in Delta shares in late March would now be over $1,500. However, year-to-date, the shares are still down close to 50%.
If you are an investor who also pays attention to technical charts, the short-term price action is suggesting a move toward $35 is possible. New investors who are encouraged by improved passenger numbers may decide to enter the airline space and commit fresh capital into the markets. Thus in the coming days, DAL stock is likely to be volatile with an upward bias.
If you already own shares, you may want to ride out any further volatility and enjoy any potential up move. Alternatively, you may consider initiating a covered call position. For example, a Sept. 18-expiry ATM covered call would decrease the volatility of your portfolio and at the same give you some downside protection. As importantly, it’d also enable you to participate in a potential up move.
On the other hand, if you are not yet an investor, you may consider buying the stock around these levels. I expect the current up move to meet resistance at $35. If we approach that level, DAL stock’s charts as well as the fundamental developments in the travel industry at the time would need to be re-evaluated to decide on the next course of action.
Bottom Line on DAL Stock
The global pandemic has made many businesses, consumers and investors feel they’re living through a movie. For the airline sector, especially the early half of 2020 has been somewhat of a scary movie. As a result, Delta’s latest quarterly results were quite sobering.
Nonetheless, Wall Street is always forward-looking. So the investing community is ready to embrace any potential positive news that may support share prices of airlines, including DAL stock.
The recent positive momentum could possibly push Delta Airlines share another 10% to 15%. Depending on your risk/return profile, you may be able to participate in that leg up in the coming days.
Finally, if you’d still like to have exposure to DAL stock, but don’t want to have the full volatility that may come with it, you may instead consider investing in an exchange-traded fund. Examples of such ETFs are the U.S. Global Jets ETF (NYSEARCA:JETS), the SPDR S&P Transportation ETF (NYSEARCA:XTN) or the First Trust Nasdaq Transportation ETF (NASDAQ:FTXR).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
