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Last night, United Airlines (NASDAQ: UAL ) management reported earnings and Wall Street loved what it saw. UAL stock rallied 5% on the headline. The airline sector has a long standing reputation that it will always manage to mess up a good thing. But this idea is slowly dying.
Something has changed because we all now pay for every perk that used to be free and then some. Even after you pay for your seat you find out that you need to pay extra if you plan on breathing oxygen while on board.
All kidding aside, airlines now are taking in more dollars than ever. UAL just delivered a monster beat above expectations on all metrics and upgraded its outlook even in the face of uncertain macro issues. Clearly the messes from the headline flubs are long gone.
The question from here is if the company can maintain this fleecing of its clients. I have no specific reason to believe that it can't, but I wanted to get the potential pitfalls out of the way before I share the upside opportunity that is still in UAL stock. I can go long, even up here on this pop.
Potential Downsides to UAL Stock
The Environment: First, let's start with the macroeconomic picture. I still believe that the fundamentals favor the bullish thesis: 2018 ended red, but that was because we had a slew of negative headlines littering our ticker tape. We have since eliminated one major fear. The Fed is no longer the enemy as they said they won't invert the yield curve on purpose. So the threat of a self-inflicted recession is now minimal.
We are left with the tariff war between the U.S. and China. Even there, the rhetoric from both sides has become more tame. They both state their optimism that they will come to terms by March. So we should have clear sailing on that front for a few weeks.
We recently have a new worry emerging from the government shutdown, which is now a record. There is a problem brewing from the TSA calling in absent since they are not getting a paycheck. This could impact UAL's bottom line, but so far they say it's not material enough to change the message.
United Airlines fundamentals are modest. UAL stock sells at a trailing price-to-earnings ratio of 10.9. This is low in absolute terms and in line with its competitors.
In short, United Airlines stock is not bloated and owning it at these valuations is not likely to be a big mistake in the long run.
I hear some experts wanting to chase laggards instead of buying the UAL stock pop. I disagree!
I'd rather bet on a team that just delivered a big win than bet that the struggling stocks of AAL or Delta Airlines (NASDAQ: DAL ). Not every lagging stock catches up because there might be reasons why they lagged in the first place.
AAL and DAL stock are down 20% and 45% over the past year, whereas UAL is up 5% … even before this pop. This is proof that if markets in general are going to be higher this year, UAL is the one major airline most likely be up at a commensurate rate. Meanwhile, the iShares Transportation Average ETF (NYSEARCA: IYT ) is down 15% for the same period.
The technical reason: UAL stock is testing a pivotal zone around $85 per share. If the bulls can prevail, they can overshoot higher toward $90. And then, with the help of a rising tide in the stock market, they can try to recapture the highs. The upper end of the ascending 12-month channel is closer to the highs at $97.50 per share. Eventually they can get there without new shoes to drop.
Since we are still in a headline trading environment and the government shutdown looks like it will go on for weeks longer, I would not take a full position at once. This leaves me room to add in case the immediate price action fades a bit.
The bottom line on United Airlines stock? Management just crushed earnings. This is an all-clear to start or add to a bullish position in United Airlines stock for the long term.
Click here and enjoy a free video and more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits .
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