What happened
Stocks were largely under pressure on Monday morning, but it was a good start to the week for the so-called reopening trade. A wide range of travel and entertainment stocks traded up on encouraging news concerning the rollout of a COVID-19 vaccine and growing hope things will be returning to normal soon.
Airline stocks joined the rally, bolstered by a sectorwide upgrade by one Wall Street bank. American Airlines Group (AAL 3.83%) led the way higher, up 10% in late-morning trading, while shares of JetBlue Airways (JBLU 6.43%), Delta Air Lines (DAL 3.04%), United Airlines Holdings (UAL 4.58%), and Spirit Airlines (SAVE +0.00%) all traded up more than 5% apiece.
So what
Airline stocks were hit hard in 2020 as the pandemic swept across the globe and wiped out demand for travel. The only way to make a bull case for the industry is a vaccine, and a steady flow of good news concerning the effectiveness of the vaccines and the progress being made distributing the shots has shares of airlines, as well as other recovery trade stocks, on the upswing.
Image source: Getty Images.
Deutsche Bank analyst Michael Linenberg is a believer. The analyst on Monday upgraded eight airline stocks, including American, Delta, JetBlue, and Spirit, from hold to buy, saying that the sector is "back on track." The number of new COVID-19 cases, the number of hospitalizations, and the vaccination rates are all "trending in the right direction," he writes, which means it is time for investors to warm to the airlines.
American and United were seen as among the most vulnerable major carriers heading into the crisis, and those stocks have been among the most beaten down. Delta and Spirit, meanwhile, are well positioned to take advantage of the early days of a recovery. JetBlue is a partner of American and could benefit if American leans on the new codeshare agreement while it attempts to get its balance sheet in order post-pandemic.
Now what
The worst is over, but the recovery will take time. The airlines added billions in additional debt during the crisis that will take time to work down. And some of the more lucrative parts of the business, international and business travel, will likely to take longer than leisure traffic to recover.
It's interesting to note that while many of the stocks still trade below where they were prior to the pandemic, airline enterprise values -- a measure of a company's market capitalization plus its total debt -- are near where they were before the crisis. That implies the next leg up in an airline rally might not come until the companies are healthy enough to pay down that debt.
For now, investors should continue to assume there will be a slow, steady recovery and should focus on best-of-breed airlines including Delta and Southwest Airlines (LUV 5.49%) as the best long-term investments. Spirit, with its industry-low cost structure and focus on leisure traffic, still looks like a good bet to be among the first to fully recover for those looking at a stock for the coming months.
The fear and uncertainty that weighed on airline stocks in 2020 is starting to recede, but there is still potential for turbulence ahead. It's safe to board these stocks, but keep your seat belts fastened.
