2 Airline Stocks On the Mend

Airlines LUV and UAL are enjoying post-earnings rallies

Jan 21, 2016 at 12:34 PM
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As meteorologists predict snowfall of up to three feet, and wind speeds as high as 75 mph in some areas, the East Coast is looking at a rough weekend ahead, courtesy of Winter Storm Jonas. And in preparation for the ugly weather, many airlines are offering travelers rebooking waivers. But among airlines with other things to consider today are Southwest Airlines Co (NYSE:LUV) and United Continental Holdings Inc (NYSE:UAL), both fresh off their quarterly earnings reports.

LUV is trading 1.7% higher at $39.96, after reporting record high earnings, thanks to low fuel costs. The company also predicted flat first-quarter unit revenue, and announced plans for an accelerated $500 million stock buyback program. The shares are still down 22% from their all-time high of $51.34 -- seen in early December -- but are attempting to close atop their 200-day moving average for the first session in four. Prior to today, the security's 14-day Relative Strength Index (RSI) was sitting right at the edge of oversold territory, at 30.

Option traders won't likely be thrilled with today's rally, however. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio of 0.96 is in the 99th percentile of its annual range. Still, open interest on LUV has been meager, hitting an annual low on Tuesday.

Analysts, at least, were relatively optimistic going into LUV's earnings report. Of the 12 brokerages providing coverage, eight maintain a "strong buy" rating, and the 12-month consensus price target on the stock is in record-high territory, at $54.23. A round of price-target hikes or upgrades, or a mass exodus of option bears, could send the shares even higher.

Also reporting earnings before the market opened this morning was UAL, with revenue and earnings-per-share coming in slightly below predictions. Still, the company's profits did spike significantly in the fourth quarter, with cheap jet fuel again a major factor. The stock was last seen 0.7% higher at $45.42, likely following the broad-market rebound.

Heading into the earnings report, UAL had fallen sharply in 2016, hitting an annual low of $42.17 on Wednesday; the shares are still off 21.9% year-to-date. In fact, the stock's 14-day RSI stood at 19 yesterday -- well into oversold territory.

And while open interest is lingering near annual lows, option traders have been displaying some renewed optimism. The stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 4.21 shows more than four UAL calls bought for each put during the last 10 trading days -- a ratio higher than four-fifths of comparable readings in the past year. However, the equity's Schaeffer's Volatility Scorecard (SVS) sits at a meager 13, suggesting UAL has failed to make big moves on the charts during the past year, relative to what the options market has priced in.

Still, the bullish trend has continued today, with UAL options volume accelerated and calls outpacing puts. It looks like some traders are buying to open 49.50-strike calls in the weekly 1/22 and 2/5 series, betting on a rebound north of the strikes before their respective expiration dates.

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