Wait for a Pullback Before Buying 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.]

Wait for a Pullback Before Buying UAL Stock

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United Airlines (NASDAQ:UAL) stock is bouncing back. Does that make shares a buy? Yes and no. The legacy carrier isn’t out of the woods yet. Stay-at-home order due to the novel coronavirus may soon start to expire. 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 through 2020, 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 have started to move higher in recent days, but could go even 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

It’s debatable whether coronavirus cases have peaked in the United States. 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 nearly 35% from its lows.

Airline stocks have also joined in on the fun. With investors more confident we will soon “return to normal,” United has rebounded about 75% from its 52-week low, from $17.80 per share to around $31.15 per share. Is this merely speculation, or is the travel industry moving to a fast rebound from the pandemic?

In short, it’s still up in the air. As this recent Barron’s article discussed, airlines like United may be doing worse than expected. As I discussed in a recent article on American Airlines (NASDAQ:AAL) stock, airlines may have to run flights at half-capacity to ensure passenger safety.

News like this makes it tough to want to jump into United. Especially after shares have climbed so quickly in recent weeks.

A Long Road to Recovery

Recently, industry leaders have indicated a rebound could be years in the making. Delta Airlines (NYSE:DAL) CEO Ed Bastian said it could take up to three years for air travel to recover. British Airways’ (OTCMKTS:BABWF) CEO also indicated recovery could take several years.

As InvestorPlace’s Jamie Johnson wrote April 27, United’s CEO Oscar Munoz also thinks travel demand won’t improve in the near term. In other words, it’s a long road to recovery. So, what does mean in terms of buying or selling United at today’s prices? Shorting the stock could be precarious, given how much “doom and gloom” has been priced into the stock. Yet, in the short-term, shares could take another dive.
The company announces earnings after the close April 30. If results prove worse than expected, or if material guidance changes are announced, shares could fall back to prior lows. On the other hand, we may be starting to see a bottom for the stock at the $30 per share price level.
That doesn’t mean today’s the time to buy United stock. Considering the potential length of a recovery, there’s plenty of time to jump in at the bottom. 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 started to price in a rebound for hard-hit industries like airlines, casinos, and restaurants. 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 absorb the upcoming earnings report, and any other developments that could indicate their prospects in the near term.

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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