[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.]
United Airlines (NASDAQ:UAL) stock may be bottoming out. 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 be starting 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 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 have bottomed out around $25 per share. 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 may be just starting to lift 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 nearly 34% from its lows.
Yet, for airline stocks like United, it’s been a mixed bag in terms of a share price rebound. United Airlines traded as low as $17.80 during the March sell-off. In April, prices surged to around $30 per share on hopes of a sooner-than-expected “return to normal.”
But in recent weeks, United shares have again started to dip back, as investors assess the airline industry’s near-term prospects.
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 52% 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. It doesn’t help that this airline is doing things like running packed flights, when they promised to practice “social distancing.”
It may not be fair to judge the airline on this one incident. Yet, any breadcrumb of bad news helps to erode investor confidence. Other hard hit industries could bounce back sooner than expected. But in the case of the airlines, prospects continue to look bleak.
So, what does mean in terms of buying or selling United at today’s prices? Shorting the stock could be precarious, given the amount of “doom and gloom” priced into the stock.
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 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 expiration of “stay-at-home” orders, and whether air travel shows signs of a material bounce-back in the short-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.