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Sunday, February 5, 2023

Take a Rain Check on United Airlines Stock

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[Editor’s note: “Wait for a Pullback Before Buying United Airlines (UAL) Stock” was originally published on April 9. It is regularly updated to include the most relevant information.]

UAL Stock: Wait for a Pullback Before Buying United

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United Airlines (NASDAQ:UAL) stock may be now trending higher. Does that make shares a buy? Yes and no. The legacy carrier isn’t out of the woods yet. Wall Street may be banking on a V-shaped recovery. But the airline industry will continue to face headwinds as air travel could be depressed for quite some time.

The $2 trillion CARES Act did provide funding to help airlines like United shore up losses. But if air travel remains depressed for years, expect the industry to need additional capital to stay afloat.

On the other hand, it’s not too late to make a contrarian bet on United. Shares may have rallied significantly in recent weeks. But they could move higher, as results wind up better than doom-and-gloom predictions.

So, what’s the verdict? Let’s dive in, and see whether you should join in on the rally, or take a wait-and-see approach.

Up in the Air for UAL Stock

States are slowly lifting their “shelter-in-place” orders. But if you go by recent stock market price action, you’d think we’ve already gotten over the pandemic. Since late March, the S&P 500 (NYSEARCA:SPY) has rebounded about 39.4% from its lows.

Yet, for airline stocks like United, it’s been a roller coaster ride. Shares cratered to their 52-week low of $17.80 per share during March’s selloff. Then, shares made an epic rebound, at one point hitting prices above $30 per share in April. But, with additional airline stock bearishness, shares fell again below $20 per share. Yet, as of late, shares have again rebounded, and now trade around $28 per share.

In short, it’s still up in the air. Analysts such as Citigroup’s Stephen Trent may be bullish on the stock, with a price target of $38 per share. Yet, with his optimism comes with a big caveat. Namely, he expects revenues to be below the high water mark for several years. In 2022, his projections call for sales 14% below where they were in 2019.

With this in mind, it could be years before the stock even hits his price target, which is around 35.7% above where shares trade today. Comparing that potential return to the many risks the airline faces, today’s prices may not be a great entry point.

A Long Road to Recovery

It could take up to five years for the airline industry to bounce back. And on that time horizon, a lot of things could get worse for legacy carriers like United. As InvestorPlace’s Dana Blakenhorn wrote May 6, the airline could be broke within a year if air traffic continues to be depressed.

Will passengers return to the skies in sufficient numbers to prevent this? It’s questionable. Traffic has picked up from its April lows, when it was down 96% year-over-year. But, as United itself has admitted, demand is “still a long way from where it was.” In short, a swift “return to normal” remains a long shot.

So, what does mean in terms of buying or selling United at today’s prices? Shorting the stock could be precarious, given from prior price action it seems investors are chomping at the bit to bid shares higher or any sign of improvement.

Yet, that doesn’t mean today’s the time to buy United Airlines stock. Considering the potential length of a recovery, there could be an opportunity to buy at lower prices. With this in mind, a “wait-and-see” approach may be the best move.

Bottom Line: Wait This One Out

In recent weeks, investors have climbed back into hard-hit airline, casino, and cruise line stocks. It’s temping to join crowd. But chances are the airline industry doesn’t “return to normal” anytime soon.

With plenty of time to enter a position, a “wait-and-see” approach may be the best way to play United Airlines stock. Let markets assess whether a V-shaped recovery is in the cards, or if prior air travel rebound forecasts are on point. You may miss out on some of the gains. But you’ll minimize a lot of the risk.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.

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