With the resurgence of Covid-19 infections in Europe and the U.S. government’s aid to Airlines about to expire, investors are pessimistic about Airlines stocks. This is why American Airlines’ stock (NYSE:AAL) has dropped nearly -10.6% in the last 5 trading days. So what does it mean for investors? We believe that the near term downside risk to the stock remains meaningful, but the current prices also mean an attractive entry point for a long-term investment. We arrive at our conclusion by assessing American Airlines’ recent market movement from three perspectives:
- Relative positioning in the market
- Underlying financial trends, and
- The output of the Trefis machine learning engine which looks at past patterns to predict near term behavior.
Our dashboard lays this out
What relative positioning suggests: Are you a value investor who identifies and invests in underpriced securities based on market comparisons? Then this might be important to you.
American Airlines’ stock price decreased -51% this year, from $28.57 to $13.80, before moving -10.6% last week, and ending at $12.34. At the beginning of this year, American Airlines’ trailing 12 month P/S ratio was 0.28. This figure decreased -24% to 0.21, before ending at 0.19. This is a sharper decline than its peer Delta Airlines. Compared to American Airlines’ P/S multiple of 0.19, the figure for its peers Alaska Airlines, United Airlines, JetBlue, Southwest Airlines, and Delta Airlines stands at 1.05, 0.31, 0.54, 1.35, and 0.31 respectively. This implies that American Airlines is priced at the cheapest end of the spectrum, suggesting room for meaningful upside.
What fundamentals suggest: Want to consider long term investment? Then pay attention here.
American Airlines’ stock price decreased -10.6% last week. In comparison, the stock has decreased -43% between 2017 and 2019, and has decreased -75% between 2017 and now. So this move seems to be in line with the long-term trend. But do the underlying financials justify the stock movement? American Airlines’ revenue has increased 7.4% from $42,622 Mil in 2017 to $45,768 Mil in 2019. For the last 12 months, this figure stood at $33,361 Mil, implying a decrease of -27% over 2019 numbers. In addition, its net margins have increased from 3% in 2017 to 3.7% in 2019. For the last 12 months, this figure stood at -10.4%. Thus, except for the impact of Covid-19, American Airlines was consistently growing its top line while maintaining the same margins. So why has the stock declined consistently? One of the reasons could be lower margins compared to competitors. For instance, Delta Airlines had net margin of 10.1% in 2019 compared to 3.7% for American Airlines. Lower margins make airlines more susceptible to external shocks such as oil price fluctuations and a pandemic. But considering current levels, American Airlines could be a reasonable long-term bet. The stock is likely to rebound as demand comes back.
What machine learning algorithm suggests: More interested in short term returns? Then you might want to give this perspective more weight.
Our AI engine analyzes past patterns in stock movements to predict near term behavior for a given level of movement in the recent period and suggests about a 34% probability of American Airlines rebounding 10% over the next 21 trading days. Compared to this, the probability of dropping further by -10% is 37%, suggesting a greater likelihood of downside. Our detailed dashboard highlights the chances of American Airlines’ stock rising after a fall and should help you understand near-term return probabilities for different levels of movements.
Taking all 3 perspectives together, we believe that risk of downside remains high in the near term. But there is no doubt that there could be good returns in store for investors willing to wait out the lean demand period. But, what if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.