2 Airline Stocks Looking to Shake Ugly Earnings Performances

LUV and AAL have struggled immediately following recent earnings releases

Jan 24, 2018 at 3:23 PM
facebook twitter linkedin

Airline stocks are trading lower today, after United Continental's (UAL) earnings call sparked fears of pricing wars in the industry. Sector peers Southwest Airlines Co (NYSE:LUV) and American Airlines Group Inc (NASDAQ:AAL) both report earnings before the open tomorrow, so this group will remain in focus going forward. We'll take a closer look at LUV and AAL to see what traders can expect.

Leisure Stocks Face High Expectations ...

With earnings season hitting its stride, it's worth taking a quick step back to look at this group as a whole. Airline stocks fall into our Travel & Leisure sector, and 85% of the names in that group are currently trading above their 80-day moving average. Plus, this sector sports an average 12-month return of 29%. Yet the percentage of "buy" ratings among analysts is virtually unchanged from a year ago, suggesting sentiment is still far from bullish on leisure stocks.

... But Airline Stocks Are the Exception

However, many analysts are already bullish on Southwest Airline and American Airlines. Starting with LUV, 11 of 14 brokerage firms actually have "strong buy" ratings in place. Not to mention the average 12-month price target stands up at $74.47 -- representing record-high territory and upside of roughly 20% from the security's current perch of $62.12.

The airline's recent post-earnings performances don't inspire much confidence, however. To be more specific, shares of LUV have moved lower in the session after earnings in three straight quarters. The shares have shown a tendency to make bigger-than-expected moves over the past year compared to what the options market has expected, too. That's according to the Schaeffer's Volatility Scorecard (SVS) of 88.

Yet even with the lackluster history of earnings reactions, the security sports a one-year advance of 25.4%, peaking at an all-time high of $66.99 on Dec. 21. And despite the 4.8% pullback today, Southwest shares found strong support from the 50-day moving average.

Turning to AAL, nine out of 15 covering brokerage firms recommend buying the stock, and the consensus 12-month price target stands up at $63.61, compared to the current share price to $54.80. American Airlines stock has earned this optimism by rising 15.1% this year.

This security's post-earnings performances have been rough in recent quarters, as well. It has only moved higher in the session after earnings once in the past four quarters, with each loss coming in at greater than 5%. It would seem options traders are still gearing up bullishly this time around, however. For instance, the Schaeffer's put/call open interest (SOIR) comes in at 0.50, meaning call open interest more than doubles put open interest among contracts expiring within three months.


If you are not making money with options, you aren’t buying options like this…

There is no options strategy that more perfectly approaches trading the fastest moving and most volatile stocks available in the marketplace than this one. In fact, there is no strategy that better utilizes put options for optimal returns and a real trading edge over other traders in the exact same market. New options traders fail out at an incredible rate without proper trade research, execution timing, and option picking. Capitalize on Schaeffer’s 100+ years of options trading excellence with the most coveted product launch in company history. Don't waste another second... join us right now before the next round of trades are released!



Special Offers from Schaeffer's Trading Partners