Airline stocks have been under pressure since last weekend’s attack at the heart of Saudi Arabia’s oil infrastructure that temporarily took out 5% of global production capacity.
But investors may want to consider buying the weakness in airlines.
“Seasonally, this is when you want to be looking to buy airline stocks,” Blue Line Futures’ president Bill Baruch told CNBC on Monday. “That’s because crude oil peaks in September, October and over the last 20 years has averaged from peak to trough about an 8% sell-off, and this brings a good support to airlines. So, I’m not saying the top in crude oil is here right now, but we could see crude oil top around $65 to $66 [per barrel], and that again is going to be supportive to airlines.”
As of Thursday, Brent Crude was up to $64.79 a barrel, just below Baruch’s estimated top.
Baruch has his eye on two airline stocks in particular: United Airlines, and Southwest (NYSE: LUV).
According to Baruch, United just moved “out above the 50- and 200-day moving average. We could see a move up to a trend line resistance around $95 to $96.50.” That target range would see the stock 6% to 8% higher.
Bernstein analyst David Vernon said that the market has been “too negative” about Boeing’s 737 grounding and that has been overshadowing potential catalysts for United shares. According to Vernon, those catalysts include the continued expansion of “premium plus” seating on the airline’s planes, improved credit card economics, and the company’s spring investor day.
Vernon also argues United is too cheap considering the stock has a market value of $23.6 billion while the company’s assets are actually worth $25.7 billion once net debt is subtracted, which the analyst says is the biggest discount among the four major airlines.
“United stands out as an overly discounted carrier, given its improved ability to generate a return closer to industry leaders,” Vernon wrote in a note. He has a $107 price target on UAL shares, indicating nearly 20% upside from here.
Moving on to his second pick, Baruch said Southwest is “about to see the 50-day moving average cross out about the 200-day.”
“It’s held the trend line support, and then that could really bring a tailwind moving it up to somewhere in the ballpark of $60 to that trend line resistance,” Baruch said. “So I think these are opportunities to buy.”
Last week, Macquarie analyst Susan Donofrio upgraded Southwest from neutral to Outperform and increased her price target on the stock to $67 – nearly 22% higher than the current price.
Donofrio cited “a focused and competitive management team with new tools,” which she said will help to extend Southwest’s recent rally. LUV is up just under 9% over the last month and has gained 18.5% so far this year.