Unlinking a chain reaction

03/12/19
  • Most airline stocks slumped yesterday as Boeing dropped
  • Airlines have underperformed the broad market in 2019
  • Delta (DAL) rallied more than 2% intraday

Despite all the technology and brain-power behind them—PhDs designing complex algorithms to capture price action most of us don’t even notice—markets still often boil down to human emotion.

The second tragic crash of a 737 MAX 8 airliner in the past six months hammered Boeing (BA) shares, which opened down around -12% yesterday. That was enough to knock around 240 points off the Dow Jones Industrial Average (DJIA) at the open, even though the S&P 500 (SPX) and other major indexes were solidly in the green.

Airline stocks appeared to be collateral damage, with United (UAL), American (AAL), and Southwest (LUV) all negative in early trading. That’s understandable, from a “gut” perspective—airlines could conceivably suffer if they had to ground some of their planes, or if some travelers cancelled their plans out of an abundance of caution, and so on—but it’s also fair to wonder if the airline selling was driven more by emotion than fact.

Most airline stocks pared their losses considerably as yesterday's session progressed.

First, although two crashes of the same airliner in six months may seem conspicuous, it’s still not known whether the accidents were a result of a design flaw in the 737 MAX 8. That may turn out to be the case, or it may not.

Second, 737 MAX 8s make up a relatively small portion of major US carriers’ fleets. For example, United and Delta don’t currently use any, and only 24 of American’s 962 aircraft fleet (2.5%) are 737 MAX 8s. Even Southwest, which exclusively flies 737s, has only 34 of the MAX 8s (4.6%).1

These realities may have begun sinking in as trading progressed yesterday, since most airline stocks (along with Boeing) had pared their losses considerably a couple of hours after the open. BA shares had rallied nearly $30 off their lows (shaving their percentage loss to less than 7%), while AAL had pushed into the green.

But that doesn’t mean that yesterday’s mostly depressed airline prices should have automatically landed all these stocks on the buy lists of traders looking for near-term snap-back rallies. Airlines have underperformed the market by a wide margin so far this year, with the S&P 500 airline sector up around 1.7% vs. the index’s 10.2% YTD gain. Also, performance has varied within the industry itself.

Source: Power E*TRADE


Yes, airlines diverged from the broad market yesterday, but not all airlines, and not all to the same degree. For example, of the “big four” US carriers (American, Delta, United, and Southwest), Delta (DAL) stood out yesterday in that it was positive from the opening bell, and roughly two hours into the session was up more than 2% (chart above).

Delta recently earned some press for its relative bargain price level (last Friday it was trading at less than eight times projected earnings for the year) and the quality of its international alliances, technology, and maintenance and repair record.2 The company recently unveiled what it describes as the largest jet engine test facility in the world—part of its plan to expand its maintenance business to include aircraft from other airlines.3

Source: Power E*TRADE


The chart above shows that since its January 3 swing low, the stock has outpaced UAL and AAL, and run neck-and-neck with LUV. It’s also climbed since the beginning of the month while the other three have traded mostly lower.

With a supportive broad market in the background, airlines may be positioned to play catch up after a down day, but as is always the case, traders need to look at the potential risks and rewards of specific stocks.

Market Mover Update: Signet Jewelers (SIG) jumped more than 4.5% intraday yesterday, knocking around 24% off the price of its April $22.50 put options since last Thursday (see “Digging for diamonds”).

Today’s numbers: Consumer Price Index (CPI), 8:30 a.m.

Today’s earnings include: Dick's Sporting Goods (DKS), GDS Holdings (GDS), Momo (MOMO), Guardant Health (GH), MongoDB (MDB), ZTO Express (ZTO).

 

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1 Airfleets.net. American Airlines fleet details; Southwest Airlines fleet details. 3/11/19.

2 Barron’s. Delta Stock Can Fly Higher. Here’s Why It’s the Best-Managed U.S. Airline. 3/8/19.

3 CNBC.com. Delta wants to make billions fixing planes, including those of other airlines. 2/21/19.

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