Will these 5 airline stocks take off?

ValueTrend’s Keith Richards warns you should have a healthy appetite for risk if you think it’s time to invest in airline stocks.


Keith Richards says of airline stocks: “An argument in favour of the airlines could be made that you don’t NEED to go to the Caribbean all-inclusive resort, but you may NEED to travel for business or family.”

With vaccines quickly rolling out, I get the occasional question regarding what sectors might benefit the most in a ‘reopening’ of the economy.

Certainly, the metals, energy and value stocks that I recommended last year have performed well. It seems to indicate that market players anticipate earnings revivals on many of the hardest-hit sectors in the economy. But what about leisure and travel companies?

While some leisure companies—such as Walt Disney Co. (NYSE—DIS) and many of the casino resorts—have done a fine job of ‘reinventing’ themselves, it’s questionable whether some of the other sectors, like cruise lines and vacation resorts, will do so well.

The bleeding coming from these sectors may take a very long time to repair. A restoration in confidence by customers of such entities may take longer in those cases, given the psychological impact of the pandemic. Who wants to be stuck on board a crammed cruise ship, or at an all-inclusive resort on a tropical island with only limited medical facilities?

Some air travel is still necessary

Air travel will face some of the same challenges as these leisure companies, given reduced volumes to travel destinations. However, an argument in favour of the airlines could be made that you don’t NEED to go to the Caribbean all-inclusive resort, but you may NEED to travel for business or family.

Further, unlike leisure companies, it might be anticipated that government bailouts would be available to ensure survival of the airline industry until things normalize. The sector is still considered essential.

Airline revenue fell more than 65 per cent in 2020 compared to 2019. Most airline stocks lost 50 per cent or more of their value as the market revalued them. Thanks to a bailout by the Trump administration, there were not any major US airline bankruptcies.

Passenger volumes will pick up as the economy reopens. The question is, how long will it take for that volume to get back to pre-COVID levels?

Although airlines will survive, it could be a while before they thrive. Still, the airline stocks appear to be oversold from a technical perspective. The stocks have been showing early signs of recovery based on hopes for both reopening, and financial assistance from governments.

I am intrigued by the airlines’ potential for a recovery trade. Are there any airline stocks to buy right now? I am considering adding one or two to our ValueTrend Aggressive Strategy. Let’s discuss some of the stocks that I have been watching for a potential trade.

Air Canada (TSX—AC)

Air Canada formed a triangle consolidation after its meltdown, as evidenced by its chart. It broke out, and looks to be retesting. This is intriguing. There has been some news surrounding the co-operation of the Canadian government in providing financial assistance to the company, similar to the US bailouts.

American Airlines (NASDAQ—AAL)

A chart for American Airlines Group Inc. shows its share price still in a triangle consolidation pattern. It needs to break out. A definitive break above US$18 a share might indicate positive stock behaviour.

There is little doubt that American Airlines will remain one of the essential airlines insofar as government support is concerned.

Delta Air Lines (NYSE—DAL)

Delta Air Lines is in an upward trend, as you can see from its chart. Imagine that! Resistance will come in at around US$50. It’s actually a fairly healthy-looking chart.

Southwest (NYSE—LUV)

It looks like Southwest Airlines Co. has had its share of love from investors. Take a look at its chart. The stock is the only airline to be toying with old resistance—and it’s not too far off of its highs.

This is less opportunistic for the contrarian player, but you are often wise to go with the winner. Clearly, they are doing something right. The stock will meet some technical resistance near US$60.

JetBlue Airways (NASDAQ—JBLU)

The story looks similar at JetBlue Airways Corp. which is near its old trading range close to US$20 a share. Clearly, they, like Southwest, are on a good path.

I must reiterate that the risk-to-reward profile of the airline industry is not quite so clear-cut as many other sectors. There are many unanswered questions regarding the willingness of their customer base to return to the historic travel patterns.

However, where there is risk, there is also potential opportunity for those investors willing to take their chances. At ValueTrend, we are considering owning some exposure to the sector, but only in our Aggressive Strategy account.

We will not be adding exposure to our conservative platform. Readers may want to view investing in this sector similarly.

Keith Richards is Chief Portfolio Manager & President of ValueTrend Wealth Management. He can be contacted at info@valuetrend.ca. He may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements”. There is significant risk that forward-looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.

This is an edited version of an article that was originally published for subscribers in the March 5, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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