2 Airlines Getting a Lift From Bullish Brokerage Attention

Citigroup began coverage on American Airlines Group Inc (AAL) and Delta Air Lines, Inc. (DAL) with "buy" ratings

Nov 18, 2016 at 11:21 AM
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Citigroup followed in Warren Buffett's footsteps, and weighed in on airline stocks. American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL) were among the stocks started with "buy" ratings, with the firm citing "slowing capacity growth from the largest carriers, gradually improving pricing, and amazingly easy revenue comps," while also saying it believes "upside revenue surprises are possible, particularly as 2017 progresses." And though at least one airline saw its rating lowered, AAL and DAL could stand to benefit should options traders fall in line with this bullish stance on the sector.

AAL has popped 0.7% to trade at $46.18 on the bullish brokerage attention. The stock is now within striking distance of its December 2015 annual high of $46.49 after booming higher on the charts since its late-September lows. Moreover, the shares have added 44% in the past six months -- barreling past the $42-$44 region, which stifled the stock earlier this year.

The fresh "buy" rating from Citigroup adds to the upbeat consensus seen from analysts, with two-thirds of those following AAL already rating the stock a "strong buy." But there's still a fair amount of pessimism to be found elsewhere. Short interest remains elevated, representing 7% of AAL's total float -- or nearly a week's worth of purchasing power, at the stock's typical daily volume.

In the options pits, meanwhile, speculators have been buying to open puts relative to calls at a faster-than-usual clip in recent months. AAL's 50-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) clocks in at 0.47. While this shows long calls more than double puts on an absolute basis, it ranks in the bearishly skewed 70th percentile of its 12-month range. An unwinding of this lingering pessimism could give AAL the fuel it needs to keep its rally alive.

The new "buy" opinion has given DAL a lift today, too, last seen up 0.5% at $48.75. The shares have tacked on a whopping 49% from their late-June annual low. However, with a 14-day Relative Strength Index (RSI) of 86 -- deep into "overbought" territory -- a breather for the stock may be overdue.

Nevertheless, the brokerage bunch is broadly bullish, with 72% rating the stock a "buy" or better. And short interest on DAL is low, currently accounting for less than 2% of the equity's available float. These bearish bets have been on the rise, though, up 34% during the most recent two-week reporting period.

Options traders seem to be taking a bearish approach, despite DAL's recent gains. At the ISE, CBOE, and PHLX, the stock's 50-day put/call volume ratio of 0.75 sits just 2 percentage points from an annual high. Likewise, near-term speculators have targeted DAL puts more than usual, per the stock's Schaeffer's put/call open interest ratio of 0.69 -- higher than 87% of the past year's readings.

Meanwhile, it appears to be a prime time to buy short-term options on both American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL). AAL sports a Schaeffer's Volatility Index (SVI) of 32% -- in the low 17th percentile of its annual range, while DAL has an SVI of 30% -- in the 13th annual percentile. Put simply, near-term options are currently pricing in exceptionally low volatility expectations on both of these airline stocks.

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