Share price increase
American Airlines (AAL) has outperformed the S&P 500 index as well as the NYSE ARCA Airline index (XAL)(XAL) ever since the stock began trading publicly after a merger in December 2013 (refer to the chart below). Its share price has increased by ~36% to $33.38 on October 17, 2014, from $24.60 on December 9, 2013. In the same period, the S&P 500 index and the NYSE ARCA Airline index (XAL)(XAL) rose only by ~4% and ~12%, respectively.
Why is it a good time to buy AAL?
As you can see in the graph above, there was a consistent increase in American’s share price until June. The stock reached its high at $44.6, increasing by ~80% in just ~134 trading days, but it started declining in July. The stock price continued to decline further despite a favorable 2Q14 earnings release on July 24, 2014, when the company announced that it had recorded the highest-ever quarter net profit.
Then came the fear of Ebola when the first case was diagnosed in the U.S. at the end of September and two more cases reported in October. All airline shares declined, but American’s shares were hit the worst. Read Why the Ebola scare led to a 16% drop in the Airline Index for more on how U.S. Airline stocks were affected by this news.
In this series, we’ll discuss why the ~25% share price decline since June was actually an opportunity for long-term investors to buy shares of American Airlines. Even though the share price has recovered to $37.42 (on October 21, 2014), it’s still lower than the average price in June (~$43). The company’s fundamentals are strong and the 3Q14 results (to be released on October 23, 2014) are expected to continue the positive trend of the first two quarters.
Long-term investors looking for a diversified portfolio can also invest in American through ETFs that hold airline stocks, such as the SPDR S&P Transportation ETF (XTN).