What happened

Shares of Azul (NYSE:AZUL) were down more than 5% on Monday after the Brazilian airline was hit with a downgrade by J.P. Morgan. Airlines have rallied so far in 2021, and at least one analyst is worried they've gone up much too quickly.

So what

By Latin American airline standards, Azul has weathered the pandemic relatively well. The stock fell nearly 90% in the early days of the outbreak and is still off by about 50% since the beginning of 2020, but Azul was able to remain flying even as some of the largest airlines in the region fell into bankruptcy.

A plane landing at night.

Image source: Getty Images.

Heading into trading Monday, Azul shares were up nearly 15% in the last few weeks after winning some positive analyst commentary. But the stock took a U-turn today after J.P. Morgan's Fernando Abdalla downgraded it to underweight from neutral.

The airline rally, according to Abdalla, has outpaced the change in business fundamentals. The analyst is worried corporate demand will likely take significantly longer to recover than bulls hope, and he says there is more downside risk than upside potential in the shares right now.

Now what

Abdalla isn't worried Azul can't survive. Rather, he thinks a recovery will take much longer than investors hope. I have similar fears about U.S. airlines, and question whether the current bout of optimism is sustainable.

For long-term holders, Azul is one of the best operators among South American carriers and should have a bright future. But this is not a good time for speculation about a so-called "reopen rally," as there is likely more turbulence for the airlines up ahead. As Abdalla warns, now is a good time for caution on shares of Azul and other airlines.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.