American Airlines announced its results for the fourth quarter of 2020 on Jan. 28. The earnings were better than expected. The company reported a net loss of $3.86, which was better than analysts’ estimate of a loss of $4.11. Still, American Airlines reported a record loss of $8.9 billion for 2020.
However, American Airlines stock still soared. At one point, the shares surged by almost 30 percent before closing the day with a gain of 9.3 percent. Why did the stock increase so much and was the surge justified? Should you buy American Airlines stock after the earnings report?
Is American Airlines a buy after its earnings report?
A surge in stock is usually justified in two scenarios. First, the earnings were much better than expected due to improved fundamentals that the market hadn't factored in. Second, management provided an outlook that was better than the market expected. Neither of these scenarios was the case with American Airlines. So, why did the stock surge?
Well, the increase had to do with a mention on the Reddit chat room WallStreetBets. The subreddit users have been deliberately pumping up stock prices, including GameStop and AMC Entertainment. The group has targeted stocks with a large short interest and bought in unison to boost the prices. The strategy worked with GameStop and AMC, sent the shares soaring, and squeezed out the short-selling hedge funds.
Among all of the airlines, American Airlines has the largest short interest. According to a CNBC report citing FactSet data, AAL has a short interest of 25 percent compared to a short interest of 14 percent and 5 percent for Spirit Airlines and United Airlines, respectively. The high short interest might have prompted the subreddit community to target AAL as well, like GameStop.
Cowen and Co.'s airline analyst, Helane Becker, said, “We do not believe the move is fundamentally driven as American’s outlook is similar to others we have heard during this earnings cycle.”
Outlook for American Airlines and the airline sector
Currently, 18 analysts cover American Airlines stock. Among the analysts, nine have a buy, seven have a hold, and two have a sell rating. Analysts’ average target price of $12.17 implies a potential downside of 33 percent for the stock. There wasn't anything much different in American Airlines’ earnings or management's outlook that would prompt analysts to change their outlook significantly.
American Airlines' outlook is likely tied to the outlook for airlines as a whole, which has been hit hard by the COVID-19 pandemic. The outlook remains very uncertain. The COVID-19 pandemic is ongoing and the vaccine distribution is still underway. American Airlines CEO Doug Parker commented during the company’s fourth-quarter earnings call. He said, “While we don't know exactly when passenger demand will return, as vaccine distribution takes hold and travel restrictions are lifted, we will be ready."
Even after the vaccine gets distributed, the travel demand isn't expected to recover to pre-COVID-19 levels anytime soon. The International Air Transport Association doesn’t expect passenger traffic and revenues to return to 2019's level until 2024.
When the travel demand does return, American Airlines might not be the first company to recover. Among the major U.S. airlines, Southwest Airlines seems like the most solid bet. The airline's cash burn rate has reduced significantly due to a rise in air traffic and cost-cutting. Also, the company's balance sheet is one of the best in the industry. If the air travel demand picks up, Southwest should be able to turn profitable faster than its peers.
Why American Airlines probably won't be the next GameStop
Subreddit community WallStreetBets propped up American Airlines stock on Jan. 28. Could AAL stock end up like GameStop? Well, the chances are low that AAL would be the next GME. The buying in GME started as a value play. Users thought that the stock was oversold and the huge short interest helped the gains multiply more. With American Airlines, however, the original value play story seems to be missing. It wasn't one of the best airline stocks even before the COVID-19 pandemic started. AAL had higher costs and debt than its peers. Therefore, AAL stock probably won't follow the same path as GameStop.
How to invest in American Airlines stock
American Airlines trades on Nasdaq under the ticker symbol "AAL." You need to have a brokerage account to invest in American Airlines stock. Then you put a “buy” order in for the desired quantity of shares. Another way to invest in American Airlines stock is to buy an airline ETF like the U.S. Global Jets ETF (JETS), which has an expense ratio of 0.60 percent. It has 8.6 percent of its funds invested in AAL.