Is it finally time to start thinking about a position in the airlines? With the country talking about steps to reopen, beaten down stocks are making a rebound, like Delta Air Lines (NYSE:DAL). DAL stock jumped over 12% on April 29 as airlines, cruise companies and more start to rebound.
If this rally has legs, DAL stock is the airline investors want to watch. It’s one of the most profitable airlines in the world and is considered a leader in the industry. If it can’t rally, it will be hard for the others to as well.
Delta stock is still more than 56% off its 2020 high. However, that’s better than United Airlines (NASDAQ:UAL), American Airlines (NASDAQ:AAL) and Spirit Airlines (NYSE:SAVE). The only airline doing better is Southwest Airlines (NYSE:LUV), down 47%.
Nimble investors have to be aware of the rotation trade. That is, where the money is rotating into and out of. When the coronavirus was hitting the U.S., money rotated out of everything, but more so out of the industries that would be hit the hardest.
It took some time to figure out what stocks would benefit from the situation, but they eventually went higher too. Names like Kroger (NYSE:KR), Netflix (NASDAQ:NFLX), Roku (NASDAQ:ROKU) and Zoom Video (NASDAQ:ZM).
Now though, money is rotating out of many of these stocks and into the beaten-down stocks. While low-quality companies can have big bounces, I’m still inclined to go with quality. That puts DAL stock on the radar.
Valuing DAL Stock
There are obvious concerns with DAL stock and all other airlines at the moment. States are starting to reopen, but it’s not something that happens at the snap of one’s fingers. We won’t go back to the way things were overnight.
Airport traffic is down immensely and no one thought this type of economic halt was possible. That’s why so many businesses are under pressure right now — from mom and pop locations to billion-dollar airlines. Obviously the fundamentals look like crap here, but you have to remember, the stock market is a forward-looking investment vehicle.
DAL stock isn’t rallying on the hopes that cash burn will shrink from $100 million per day to “just” $50 million per day. It’s rallying on hopes that airline traffic is hitting a trough and will begin to rebound as we approach summer. It’s rallying on hopes that in six months, business will be reasonably steady and Delta will be operating at a profit.
One problem here is that these next six months — April through September — are the most profitable quarters for Delta. It’s when it generates most of its revenue and free cash flow, and thus, most of its profit.
Seeing those quarters take a hit will be concerning. But the focus is shifting away from Q2 and Q3 to being back on track by Q4. Then focusing on 2021 being business as usual. Current cash burn is a concern, as it’s management’s goal just to get down $50 million in burn per day. However, with federal aid and $6 billion in liquidity at the end of the quarter, Delta should be okay.
There’s a concern that the coronavirus will have another breakout in the fall or winter. If that’s the case, the airlines are in trouble. but for now though, we have to follow the money, and that money is rotating back into DAL stock and its peers.
Trading Delta
A look at the charts reveals the recent move in Delta.
On Tuesday, the stock broke out over downtrend resistance and the 20-day moving average. That was the first sign that buyers were really stepping into DAL stock in a significant way.
I liked how the stock held $21 support even after reporting a disappointing quarterly result. It was also able to make a series of higher lows (purple arrows).
Now I want to see if the stock can get to and stay above $30. If it can, it will mean that Delta reclaimed its 23.6% retracement. Keep in mind, the broader market has retraced close to two-thirds of the decline. That shows the catch-up potential in the airlines if they really start to rally.
Over $30 puts the declining 50-day moving average near $33 and the 38.2% retracement near $35.65 in play. On a decline, I want to see the 20-day moving average hold as support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long ROKU.