Airline Stocks Look Like a Decent Buy, But With a Non-Traditional Trade Structure
Surprisingly enough, I am feeling sorry for the airlines right now. It should be hard to generate sympathy for an industry that has, in the not-too-distant past, has shown such disregard for shareholders, destroying their investments by using bankruptcy as a negotiating tactic. That's not even taking in consideration the remarkable disregard it's shown for its customers, nickel-and-diming them in every imaginable way, even as seats get smaller and tighter and legroom shrinks.
Despite all that, it is hard not to feel sorry for them because it seems that, over the last few years, the airline industry really couldn't catch a break.
First, there was Covid. Understandably enough, people were wary of being enclosed in a metal tube with a bunch of strangers, and airline revenues plummeted. Then, just when things seemed to improve after the initial wave, multiple variants set us back, further delaying a return to normality. By February of this year, we seemed to have broken the back of the pandemic, variants and all, but Russia chose that time to launch a brutal invasion of Ukraine.
Obviously, there are ramifications that are way more serious than the impact on the airlines, but as airspace was shut down and oil soared, airline stocks got hit hard again. The three big American international carriers, American (AAL), Delta (DAL), and United (UAL) all saw their stocks lose 25-30% in a week.
If we learned one thing from the recovery from the pandemic, though, it is that people love to travel and will return as soon as they feel able, even if that involves inconveniences like mask mandates and a reduced number of flights. When they do, it will quickly become clear that airline stocks are way oversold. It is not that the problems airlines face aren’t real, it’s just that they are temporary.
Based on the level of resistance and determination shown by the Ukrainian people and the fact that Putin has backed himself into a corner where a face-saving outcome is hard to foresee, the conflict in Ukraine doesn’t look like it will end any time soon. However, as time goes on, the impact on the airlines will fade. They will use routes for international flights that avoid the area and resume flying, and oil has shown us many times that it is volatile in both directions and as sure as eggs are eggs, a big jump will be followed by a big drop at some point.
So, international airline stocks look like a good long-term buy. However, with the current level of volatility, we could still see them lower over the next few days or weeks. That results in two questions for investors: What constitutes a good entry point, and how can you mitigate risk if you do buy?
In both cases, the traditional way to structure a trade is of no use in the current circumstances. Normally, to arrive at an entry point for a stock, I would look at the chart, seeking support levels to trade just in front of or resistance levels, a break of which would be a buy signal. Then, based on that entry point, I would set stops to guard against crashing down through the support or dropping back below the resistance. Right now, though, with AAL, DAL, and UAL having traded in intraday ranges that represent well over 10% of their price for two straight days, supports and resistance levels are non-existent, and any stop close enough to be useful is in danger of getting hit almost immediately.
The answer is to employ a tactic often used by investors: dollar cost averaging. The idea is to break your total intended investment down into parts, then invest each part separately at preset intervals, with time, not price determining your entry point. That way, if the stock goes down after your first trade, you are happy because you can buy it for less next time around. On the other hand, if it goes up, you are still happy, because you bought some on the cheap. Normally, for base portfolios, dollar cost averaging is done over weeks or months, but for a trade like this purchases can be made on a daily basis for a few days.
What dollar cost averaging into a volatile market allows you to do is to get involved while things are flying around, without adding a massive amount of risk immediately. What matters is not where each individual trade is done, but where your average price ends up. Once that is determined, you will have days of price data off which to determine stop loss levels and can take it from there.
Whether you adopt the above strategy or not, and whether you choose to buy airline stocks or not, there is one key thing to realize here: One of the most important things to be when it comes to trading and investing is flexibility. It is all too easy to get sold on a “system” or trading style, but no successful trader ever employs only one signal or trade structure regardless of what is happening in the market. Unusual times call for unusual trades and, right now, that means averaging into even single stock positions.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.