High-flying airlines on their way to bluer skies?
12/15/17

Don’t look now, but airline stocks—so often berated for their exposure to cyclical economics and volatile energy prices—have lately been one of the hotter industries in the industrial sector.

Yesterday, for example, seven of the top eight stocks in the S&P 500 industrial sector were airlines or aircraft-related companies, including Southwest Airlines (LUV) and Delta (DAL), two stocks that have stood out in recent weeks by soaring upward to challenge (or slightly surpass) longstanding highs.

Although LUV’s flight path this year has been rather choppy, it nonetheless put in an all-time high of $64.39 in July and just returned to that level with yesterday’s rally, challenging the top of the broad trading range that dates back to March. These are lofty levels indeed.

Southwest Airlines (LUV), 2/25/13 – 12/14/17

Source: OptionsHouse

What gives? A few factors have been adding to the industry’s recent ascent, and LUV’s specifically:

●The International Air Transport Authority (IATA), the global airline trade association, has issued bullish 2018 forecasts for the industry, most recently an announcement yesterday that the industry would return to record profitability next year (after a lackluster 2017), driven by factors such as increased travel demand and an expected jump in airfares.1

●US airlines are one of the industries that currently carry a hefty tax burden, and stand to benefit from corporate tax reform.

●LUV, which was already up more than 25% year-to-date and up 18% since November 13—and that was before yesterday’s nearly 1%-plus gain—got some extra tailwind of its own in the form of an upgrade from investment bank Atlantic Equity, which saw the potential for a 31% increase in LUV shares. The firm gave a nod to “tame” oil prices and an overall rising stock market in its decision to give the stock an “overweight” (buy) rating.2

And if that wasn’t enough, let’s not forget that longtime airline-stock critic Warren Buffet announced in fall 2016 that he would be investing in the industry, and as recently as this spring was still adding to his positions.3

Southwest Airlines (LUV), 7/6/17 – 12/14/17

Source: OptionsHouse

All of which—especially since LUV and some other airlines have recently approached obvious resistance levels—might lead traders to wonder whether all the good news is priced into the market. In short, are airlines still on autopilot or are they going to be forced to land and refuel? (The stock, by the way, retreated from its highs yesterday to close relatively low in its range.) 

Well, just to look at LUV’s recent four-week pattern of higher highs and higher closes: Analysis of similar past runs suggest the stock might be inclined to cool its jets for a bit. While not overly bearish, the stock’s returns were no better than average for the first week or two after these runs. After six weeks, though, the stock’s return was more than twice its historical average.

 

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1 Gulfnews.com. Airline sector to return to profitability in 2018, IATA says. 12/14/17.

2 TheStreet.com. Southwest Airlines Stock to Skyrocket 30% in 2018. 8/17/17.

3 DallasNews.com (AP)Warren Buffett buys up more stock in American, Southwest airlines. 5/15/17.