After reaching a high of $26 in mid-March, American Airlines Group (NASDAQ:AAL) stock has lost some altitude. It closed yesterday at $23.86.
But the shares have still gained 51% in 2021.
Many other airline stocks, including Southwest Airlines (NYSE:LUV), United Airlines Holdings (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL), have also rallied this year. In fact, the major airline equities’ charts all look nearly identical!
So all in all, there has been a major rotation into the space, causing other sectors, especially tech, to sink. The airline stocks, of course, have been boosted by the re-opening trade.
But is AAL stock a good choice right now for investors? Or is it better to wait before taking a positive position in the name?
Let’s take a look.
The Macro Environment
The outlook of air travel is definitely promising right now. With the aggressive rollout of the vaccines for the novel coronavirus from companies like Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and Johnson & Johnson (NYSE:JNJ), it does look like the U.S. will get back to normal soon.
In the meantime, there is considerable pent-up demand for travel. Keep in mind that Americans are already traveling more. According to the latest figures, during a recent week, domestic daily air traffic averaged 1.2 million per day. That is the highest level since the beginning of the pandemic.
What’s more, Congress recently approved $1.9 trillion of stimulus for the U.S. economy. That spending should also promote strong demand for travel in the coming months.
The pandemic triggered a near-death experience for American Airlines. Without the government’s support, the company may have gone bust and the owners of AAL stock would have lost most of their investments.
But the pandemic had some silver linings for the airlines. Its operations have become much more streamlined because of the heavy cost cutting and efficiency efforts that it undertook. So as its revenues start to climb, it should benefit from considerable operating leverage.
Yet AAL stock still faces some risks as well. First of all, American has increased its debt load to a hefty $50 billion, and its annual interest costs are $600 million, so interest payments will weigh on its bottom line.
Next, the company’s international business may lag because of the slower rollouts of vaccines in other countries. The same factor could keep a lid on business travel. Moreover, businesses have become accustomed to holding meetings on videoconferencing platforms like Zoom (NASDAQ:ZM).
Finally, energy prices – which are a big part of airlines’ costs — may be a wild card. Oil prices have surged lately, and they may continue to do so as the economy rebounds and supplies remain fairly tight.
The Bottom Line on AAL Stock
AAL stock is not too far off from its pre-pandemic levels. Thus, investors may already have baked in much of the airlines’ positive news.
Wall Street analysts believe that the stock’s valuation is high. Their average price target is about 25% below the shares’ current price
I do think the reopening of the U.S. economy will continue to be beneficial for the airline industry. But it’s probably best for investors to consider buying the shares of carriers that will get the biggest impact from the reopening because of their high percentage of domestic and leisure traffic .
It’s also a good idea to buy the shares of the airlines that have the strongest balance sheets. in the sector. Based on these criteria, airlines like Southwest and Allegiant Travel Company (NASDAQ:ALGT) are more attractive than American.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.