Is American Airlines Group Inc (AAL) Poised For a Post-Earnings Sell-Off?

Following Southwest Airlines Co's (NYSE:LUV) post-earnings slide, is American Airlines Group Inc (NASDAQ:AAL) the next to go?

Jul 21, 2016 at 11:44 AM
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It's a tough day for travel stocks. The turbulence began when German airliner Lufthansa gave a downbeat outlook, citing recent terrorist attacks and political turmoil. Disappointing second-quarter earnings from Southwest Airlines Co (NYSE:LUV) is exacerbating these troubles, and American Airlines Group Inc (NASDAQ:AAL) is feeling the headwinds. Ahead of the airline's earnings release tomorrow morning, AAL stock is down 2.3% at $35.09, and an earnings miss could push the shares even lower. 

For instance, sentiment among analysts is almost entirely bullish. Eleven brokerage firms track AAL shares, and nine of them recommend buying the stock. Meanwhile, AAL boasts an average 12-month price target of $41.04, which represents a 17% premium to current levels. As such, a round of negative analyst attention is certainly not outside the realm of possibilities. 

Options traders have also shown bullish tendencies. During the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), AAL has posted a 10-day call/put volume ratio of 3.86, which not only tops 68% of the past year's readings, but shows almost four calls have been purchased for every put. Plus, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.34 ranks in the 14th annual percentile, hinting at an unusual call-skew among short-term speculators. An unwinding of this optimism could work against the shares in the short term. 

Some traders have been preparing for an AAL sell-off, though. For instance, short interest has been steadily rising on the stock for months, and now more than 43 million shares are sold short. This represent the highest level of short interest seen since early 2014.

There's good reason to be skeptical, too. First of all, American Airlines Group Inc (NASDAQ:AAL) shares have fallen in the session after an earnings release in three of the past four quarters -- including a 4.5% sell-off last quarter. Second, AAL has underperformed significantly in 2016, losing over 17% year-to-date. It's therefore not hard to imagine the stock could easily suffer a similar post-earnings fate to LUV. 

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