In my earliest investment career, I was more of a purist fundamental trader. Over the years, however, my methods have started to depend on technical analysis as well. Still, the actual story behind a ticker remains at the base of my theses. I bring this up because it’s an important concept to remember as we discuss United Airlines (NASDAQ:UAL) and conclude where the future might take UAL stock.
Normally, I would start a piece like this by addressing traditional fundamental metrics. However, in this case they would take us down a misleading, bearish path.
When it comes to UAL, the financial ratios are still terrible versus their pre-pandemic history. Total revenues are still down 60% from three years ago. Moreover, the trailing 12-month (TTM) net income is now a whopping $5.5 billion dollar loss. For comparison, in 2019, the company netted $3 billion. Clearly then, United’s profit and loss (P&L) is broken but not the company itself.
UAL Stock: Strong Management Matters
When it comes down to it, United Airlines’ management did nothing wrong. Rather, UAL suffered the consequences of a global shutdown. Still, with the help of the government (and a lot of borrowing), they withstood the worst of it. Plus, there is good news here — and it has actually been going on for months.
According to Transportation Security Administration (TSA) statistics, travel is up drastically this year and inching towards 2019 levels. Of course, we are not there yet, but we’re getting close. This is just where it all starts; there will be growing pains and the airlines are already feeling it.
Once a company has a healthy revenue stream, though, it can start to heal its financial statements. Currently, there’s still about a month of summer travel left, so the window for United to make more progress is closing.
UAL stock, however, is not yet showing the same improvement as air traffic. Since its peak in early June, the stock has fallen more than 25%. And this statistic is even worse if you go back a couple of months.
That said, from the technical perspective, there’s still good news: $42 per share is a supportive zone. So, even if UAL stock falls, there is much stronger support just $2 to $3 lower. This served as the base of the 60% February rally. Still, if the stock loses support, the bears could inflict further damage.
If markets in general correct, UAL stock could lose another 20% from the recent lows. I am not calling for it — I am merely acknowledging the possibility. Management recently reported its earnings and investors liked what they saw. The pop from that is fading, but there’s still progress there. Conversely, there’s also resistance on the way up, so the bulls have to be realistic in the short term, too.
The Verdict on UAL Stock
To close, I will split my decision into two possible courses of action. The first strategy would be to consider a partial entry in UAL stock as a long-term investment. Buyers should not expect immediate profits, however. The outcome of that gamble will not come until after years of normalcy.
The second, shorter-term strategy for this stock would be to trade around the current price levels. For that, I expect resistance into $50 per share. If the bulls take it out, they can use it as a catalyst for another 10% rally from there. This bull-bear tug of war will inevitably ping pong inside the range until one side gives out.
Using options can allow investors to act early. For example, instead of buying UAL stock at face value now, I would sell puts instead. This immediately gives investors a bullish position but with room for error. Moreover, the trade requires no out-of-pocket expense — in fact, you would collect a credit to open it. The worst-case scenario would be owning shares at a lower price.
Overall, I am bullish on UAL stock as long as the markets are bullish. I was much more enthusiastic about it last September. However, I have to also disclose that I’m concerned about the second half of this year for all equities. Investors should balance their portfolios with bearish positions just in case the wheels fall off this wagon.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.