Is American Airlines Stock Ready to Take Off Now?
The more a stock gets beat up, the more the bargain hunters salivate. These mouths have plenty of reason to water with American Airlines, but should this meal be served?
Bottom picking stocks can be a challenging task, but if you can get in at the right time, these plays can turn out to be profitable overall. The challenge is to actually pick the bottom and not just try to get a foothold and end up slipping and falling further down with the stock.
There are two main approaches that people use to bottom pick, which is technical and fundamental analysis. Of the two, the technical approach is the superior one by a good margin, since it does require that the fall actually show us that it is ending enough to provide the positive expectation that we need, and is especially important in timing our entry properly.
If we were looking to jump on American Airlines right now, just a quick glance at the chart would show us that this is not the time, not yet anyway, as all of the trends are pointing down with it, including the short-term one. We’re off over 10% since the little peak on September 9, and the price has been falling since, and all of the other time frames are pointed in the wrong direction as well.
However, we don’t want to just throw this away just based upon this, as this stock has presented many good swing trading opportunities over the last while, as we will discuss further later on in the article.
Trading on this timeframe really takes the fundamentals out of the equation, as all we are looking for is movements in either direction that are sustained, and American has given us plenty of that. It’s not important to know what is behind this, because whatever it is has caused the stock to undergo a period of distribution, where it recovers for a while and the big sellers then step in and unload a bunch of stock, doesn’t really matter. The chart tells us everything that we need to know here.
If we’re instead looking to take a position in it over the longer term, we do need to be aware of what is going on with the company, although this in itself won’t be enough. We still need to look to the charts to confirm our findings as well as decide when it is time to get in, because whatever may change with the outlook of a company will need to be confirmed by the charts before it becomes validated.
Just jumping on with no regard to a stock’s chart is always a mistake and is like volunteering to put a blindfold on. If we do this, we are risking getting in while the stock is more likely to go down than up, which is a bad move in all cases.
At best, even if the stars were aligned enough to have us wanting to enter a stock like this based upon fundamentals, we’d still need to wait until whatever we think that will turn the stock around starts to actually materialize, otherwise we’re just asking for trouble. Bottom picking is risky enough without adding even more by closing our eyes and hoping that our blind stab at this will work out.
American Stock Has Been Going Down the Stairs for 21 Months Now
American’s chart looks terrible right now on this time frame, having taken the stairs down to the basement since January 2018. This chart is a great example of this phenomenon, where for the last year and 9 months, American Airlines’ chart has made both lower lows and lower highs all the way.
This is a classic example of long-term distribution, where distribution here means huge sell orders that are executed over time with the goal to minimize the losses. Very large investors don’t just sell all at once, they will sell the rebounds, and back away when this selling pressure sends the stock lower than it was.
At that point, the bulls with their smaller pockets step in and drive it up some more, and then the bears get back into the game and get to unload some more. This is a clear bearish pattern, and the only real question is when it will end. While it is still going on is not the time to get in though, as we don’t want to be guessing or hoping too much with bottom plays.
Al Root of Barron’s likes American here though and thinks that the chances of it taking off again soon makes it worth jumping on now. While the chart strongly disagrees, and Root admits that the fundamentals are terrible, he bases this pick on American’s declining price to 2020 projected earnings. He’s not alone because a lot of people fall for this ruse, and American is a good example of why this is not how to approach investments.
American Airlines started out on this journey with a pretty nice-looking ratio here, meaning low, if this sort of thing appeals to you that is, and this number has just gotten better and better, if this is actually better that is.
Obviously, we could have bought American at any point during the last year and nine months and be sitting with a loss, save for a couple weeks during August, and the earlier you bought it, the bigger the loss. This is what too often happens when you invest in a declining stock like this.
We could just counter this with preaching patience and telling people to wait until the rain actually stops and the sun starts to peek out from behind the clouds, but that still isn’t enough reason to do it. With investing, we need to have both the charts working for us and a good reason that this will continue, which does require that we look at the company.
If this ratio actually exerted a positive influence on the stock, it being so low lately should have at least served to stop the decline. Aside from needing to see the decline stop to want to be in it, we also need to expect it to rise so we have the positive expectancy that we need. We can invest without this but we need to try our best to be sensible.
The reason why earnings ratios can go down so much and stay down is that there isn’t a curtain hanging at the end of 2020 like some people seem to think. The problem with the way just about everyone uses fundamental analysis is that they look to truncate the stock’s horizon like this and then wonder why what they are seeing doesn’t match reality so often.
We can actually solve this puzzle just by using fundamentals. The lower the short-term earnings ratio, and we need to call using next year’s earnings short term because that what it is, the poorer the market views a stock’s longer-term fundamentals. If you believe fundamentals matter, then you must accept this truth.
When Bad Numbers Get You Excited, Something is Definitely Wrong
Jamie Baker of JP Morgan, for example, believes that “at this valuation level, we believe that investors are more than compensated for lower margins and a riskier balance sheet.” We could also throw in the potential labor problems they have, the mess with the 737 MAX, and everything else unsavory that is going on with American Airlines right now.
Baker has also limited his vision to the curtain at the end of 2020, but what the dreadful ratio of just 5 times 2020 earnings predictions should really serve to do is to tell us that the market is discounting this stock due to its expected performance beyond 2020. Instead of exciting us, this number should scare us quite a bit actually.
The market isn’t always right of course in the end, but we do know that their views, however correct they may be in the end, do move stock prices in the direction they choose. The market is telling us that they simply do not like this laggard airline right now, and the fact that the 737 MAX will be coming back is already accounted for in this stock’s price as this is all well-known.
Some of these plays do work out, but they are the ones that both show actual hope on the fundamental side along with a confirmation of this hope by the market. One out of two will not do, and the none out of two that we have with this particular pick certainly will not.
In fact, this view makes so little sense that if we had to act, we should fade it and short the stock, but we do not need to and given that so much selling has already gone on, the potential upside for a short is too limited to get very excited about. A low ratio may limit the downside somewhat, but as it trends down, this bodes not well but poorly.
We mentioned that this stock has presented some nice opportunities for swing trading though, and just looking at the chart since 2018 clearly shows a pattern here, and one that would have been fairly easy and very nicely profitable to trade.
The goal here is to ride the waves when a stock is in distribution mode like this, and in these cases in particular, where the moves start and end is pretty well telegraphed. Right now, we’re in a down leg, and you don’t usually want to jump in on these in mid-course, but a good plan here may be to wait for this stock to stop going down and jump on then, with a tight stop in case this pattern is really over.
Trades longer than this should be limited to the short side, as beyond this, the trend is clearly downward on all other time frames. Stocks aren’t just about figuring out the direction though, as we need significant potential our way to justify the trade or investment, and this stock does not have very much to get us excited about either on the long or the short side.
If a company’s fundamentals are declining and its stock is declining even more, leading to lower earnings ratios, this is doubly bad. If we really want to use these numbers in a useful and not harmful way, we will plot them on a chart, where movements up or down will indicate where things are headed on this front, and when things may be turning around. We want this to go up, not further down, so we view it like a stock on a chart, and this is the only sensible way to use these ratios.
If we realize that movements down mean the market is discounting the stock’s future value and moves up mean that its future value is increasing, we could really help ourselves and help avoid the pitfalls of chasing bad stocks and having this cost us money so often. Any strategy will work some of the time, but the good ones work more than they don’t, and what happens in the end is what matters.
Once we toss the next year curtain and look upon the actual horizon, there is very little left to like about American Airlines right now as far as investing in it goes, but we’ll never see this if we insist on limiting our vision so much.
Editor, MarketReview.com
John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.
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