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Are Airline Stocks A Buy? at Trader’s Narrative




Are Airline Stocks A Buy?


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While the transportation sector has been going strong, the airline industry - a sub-sector of transports - is scraping the bottom of the graph at multi-year lows.

Imagine how well the transportation index would be doing if the airlines had been contributing or at least keeping up with the rest of their peers. Accounting for almost 11% of (dead) weight, the following airlines are in the Dow Jones Transportation Index:

  • AMR Corp. (AMR)
  • Continental Airlines Inc. (CAL)
  • JetBlue Airways (JBLU)
  • SouthWest Airlines (LUV)

Recently there’s been some turmoil in this sector with a few bankruptcies, fleets being grounded and just today, Northwest Airlines and Delta decided to merge. This sort of shake up is common place in this sector and it happens ever few years. Airlines are a notorious black hole for capital - even the sage of Omaha, Warren Buffet lost his shirt when he strayed too close.

But do the extremely “cheap” airline stocks mean that this sector is a buy? or put another way, are they cheap enough?

From a fundamental point of view, I can’t say that I have a clue. But from a technical perspective, I don’t think so. Here’s why:

XAL amex airline index long term chart

The really important double bottom that was formed in the end of the last bear market was at 30. In January 2008, the AMEX Airline Index (XAL) ricocheted higher after grazing the same level. But in contrast to before, the ensuing rally was short lived and it subsequently fell below that important support line.

So right now the index is approaching the 30 level again but now it is facing it from below, as resistance, rather than support. That’s an important distinction.

Also, it is no longer in step with the parent sector (transports). The bullish percent index for the Dow Jones Transportation Index is at 55% while it was at 15% and lower in 2003. I am too lazy to look up the Airlines bullish percent index but my hunch is that it would be wallowing in the 10-20% range.

So I wonder… why does the market shrug off all the reasons why the land and sea transportation companies’ stocks should be sold (high energy costs, recession, etc.) but not the airlines?

Finally, taking a look at the component stocks tells me that they are either below or far away from a base or support level. Take for example, JetBlue (JBLU): In March 2003, when the airline sector put in its major multi-year bottom, JBLU traded at $10/share. It is now trading at $5.18/share. Almost half that level.

The opposite could be said of AMR because it traded at $2.50/share in 2003; which means that it still has a lot of potential room to fall from its present level of $9.34/share.

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2 Responses to “Are Airline Stocks A Buy?”  

  1. 1 Bill Mandel

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    You were on-target about the airlines in your April 14th blog. Has your technical view changed in view of the debacle this week, and do you have any particular thoughts about JBLU? Thanks.

  2. 2 Babak

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    Thanks Bill. The airlines are the mirror opposite of the energy sector - obviously as the price of oil goes up they suffer tremendously. While the XAL continues to stair step down, JBLU was trying to cling to support at $4.50 - unless it can miraculously regain that level, a lot of stop losses will begin to fire (as they have already started to no doubt).

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