Photo: Wikimedia Commons
Airline stocks have been under extreme selling pressure lately, as shrinking margins, high oil/fuel prices, fare battles, and lower overall travel have taken their toll on both current and future profits.The turmoil has made shares of airliners a favourite target of short sellers over the past six months, as nearly every major airline stock has sustained significant losses in that time.
Delta Airlines, United Continental Holdings, US Airways, JetBlue Airways, and AMR have combined for an average loss of 37.2% over the past six months – ouch.
Additionally, all of these stocks hit new 52-week lows in today’s (Wednesday’s) trading session.
AMR, which operates American Airlines, has been the weakest stock among the group over the past six months, losing 44.4% in that time. In its last earnings report on July 20th, the company reported Q2 losses of $0.85 per share versus analyst estimates of a $0.81 per share loss. Because AMR has no earnings, a good measure of valuation is the Price to Sales Ratio (PSR), which is a calculation of a stock’s share price relative to its revenue per share. AMR currently has a Price to Sales Ratio of 0.06, far below the industry average of 0.78. On this basis, AMR appears attractive.
The level to watch for AMR is $4.00. The stock has only traded below that level in 10 sessions over the past five years. However, when the stock broke below that area, it saw a large decline to its five year low of $2.40 (March 2009).
In Wednesday’s session, AMR showed signs of strength late, as it bounced off of its 52-week low of $4.00 and closed near its high of the day ($4.23) at $4.20. The stock has lost 19% over the past 10 sessions, and is currently trading 25% lower than its 50-day simple moving average (one year daily chart), which is currently at $5.60. Shares have fallen far below their downward sloping trend line dating back to 1/07, and may be due for a significant upside retracement. The risk/reward ratio looks good here, as long as $3.99 is used as the stop out. Picking up some $4.00 put options as protection would not be a bad idea depending on the projected length of ownership. September 4.00 strikes are currently trading for $0.31.
Shares of US Airways have lost 44.1% over the past six months. In its last earnings report on July 21st, the company reported Q2 earnings of $0.56 per share, which met analyst estimates. US Airways has a relatively low price to earnings ratio (P/E) of 5.59, far below the industry average of 11.72.
In Wednesday’s session, US Airways deteriorated throughout the day, closing near its intraday low ($6.11) at $6.18. The level to watch for US Airways is $5.70, which was a strong area of support in 2010. A break below that could send shares to the infamous $5 area. Over the past five years, breaks below $5 have sent shares of US Airways down to as low as $1.45 (July 2008).
Currently, the stock does appear oversold, both on a fundamental and technical basis. Shares are currently trading 26.5% below their 50-day simple moving average ($8.48 on a one year daily chart), and have only had two positive sessions out of the past 17. If you choose to get long, keep tight stops, as the stock has shown no qualms about trading in the low single digits.
Shares of Delta Air Lines have lost 38.1% over the past six months. In its last earnings report on July 27th, the company reported earnings of $0.23 per share versus earnings of $0.55 per share for the same period last year. Delta’s earnings were hurt by high fuel costs and one-time costs such as severance payments and facility closures.
Delta has strong support around the $6.75 level, dating back to August of 2009. Beyond that, no support comes into play until the $5.50 area. Shares are trading around the middle of their five year range (high of $21.95 to a low of $3.51). The stock has attempted, and ultimately failed on numerous occasions, to hold above $14 over the past fourteen months.
In today’s (Wednesday’s) session, shares of Delta bounced off of their 52-week low of $7.28, closing near the top of their intraday range at $7.61. The stock is currently trading 19% lower than its 50-day simple moving average ($9.39 on a one year daily chart). A test of the downward sloping trend line (dating back to May 20th) around $8.85 may be in the near future. If you choose to get long here for a short term trade, keep your stop at the low of $7.28 in order to maintain the positive risk/reward ratio.
Shares of United Continental have lost 33% over the past six months. In its last earnings report on July 21st, the company reported earnings of $1.49 per share, which met analyst estimates. United Continental has one of the highest Price to Earnings (P/E) ratios in the industry – 13.59 versus the industry average of 11.72.
Shares of United Continental have experienced tremendous gains over the past two years, gaining 385% in that time – jumping from $3.72 per share to their current price of $18.06 per share. Given that gain, along with the high valuation, investors should be somewhat wary of this stock, as there is quite a bit of room to the downside if airlines continue their negative trend.
The level to watch for United Continental is the 200-day simple moving average (five year daily chart), which is currently at $17.72. Beyond that, no support comes into play until $16.40 and then at $12.15. Looking at a two year daily chart, a bearish mountain range pattern has taken shape as the stock has put in a series of lower highs and lower lows. While a short term correction to the upside may be in the near future, a large percentage move to the downside appears likely long term.
JetBlue Airways has been the “strongest” performing airline of the group, losing 26.5% over the past six months. In its last earnings report on July 26th, JetBlue reported record revenue of $1.15 billion. The company’s profit, however, fell 19% to $25 million due mainly to a surge in fuel costs.
The stock has only had three positive trading sessions out of the past 17 and has lost 24.5% over that time. While the stock has been crushed recently, the action in Wednesday’s session suggests that more pain may lie ahead, as shares were sold off on 3.3 times average daily volume, and closed at their low of the day ($4.70).
The two year low of JetBlue is $4.64, which was set on February 5, 2010. Looking at a five year daily chart, it appears as though below that level, no significant support comes into play until $3.72 (June 22, 2009). The stock has traded below $3 on only two occasions over the past five years, and has a history of putting in large percentage gains after selloffs to the low single digits.
Investors looking to get long may want to wait until buyers emerge. Be on alert for an intraday reversal off of a fresh 52-week low. Such a catalyst may be the beginning of a significant upside correction.
Whether airlines will continue their plunge is anyone’s guess, as no one can predict what will happen in the market. All a trader or investor can do is find opportunities that provide a good risk/reward ratio and execute accordingly. Given the recent plunge of these stocks, airlines are at least worth taking a look at, as the burden of risk shifts to the short side with every new 52-week low.
Keep an eye on the oil market as well. Crude futures have recently retreated from the $100 level, but have been consistently above $90 since February. A downturn in oil, which more than likely will be accompanied by a drop in the overall market, may send airlines higher, and serve as a nice place to hide should the market take another tumble.
Time will tell.