The airline sector is poised for a rebound in 2022, according to one Wall Street analyst, making it a great time to buy in. That has airline stocks that trade in New York soaring higher on Friday, with Delta Air Lines (DAL 2.62%), American Airlines Group (AAL 2.65%), Spirit Airlines (SAVE 1.32%), and Azul (AZUL -0.44%) all up as much as 5% during the session.
Airline stocks had a miserable 2020 due to the pandemic, followed by an uneven 2021 as initial optimism after vaccines were released was replaced by new worries about the rise of variants. As the year went on, investor sentiment concerning airlines got worse and worse.
Bank of America analyst Andrew Didora thinks the tide is about to turn, saying interest in the sector is at its lowest in recent memory but adding that "times of poor sentiment are usually good times to buy airline stocks." In this case, Didora is hopeful that the omicron variant will soon be past its peak in the U.S., allowing the gradual return of corporate travelers and a healthy consumer eager to travel heading into spring break and summer.
Didora favors Delta over American or United Airlines Group (UAL 2.50%), citing Delta's strong balance sheet, attractive valuation, and history of disciplined growth. He also likes a number of discounters -- the airlines that tend to react best when leisure travel is leading the way.
While not naming Spirit as one of his top picks, the ultra-low cost carrier is popular among many on Wall Street due to its industry-low costs.
Azul is based in Brazil, and has its own COVID-19 issues to wrestle with. But the airline by virtue of trading in New York tends to rise and fall along with the U.S. carriers. And although Brazil has trailed other parts of the world in terms of vaccination rates, Azul has established itself as one of the Latin America's best operators, and it should have opportunities to gain market share as the rest of the industry digs out from the damage caused by the pandemic.
It's hard to get too excited based on hopes that things can't get any worse. That's not quite what Didora is saying, but investors should be mindful that even if the worst is over, there is still a long way to go before conditions normalize. International travel remains low, and higher-margin business travel is unlikely to rebound while most office places are still closed.
Delta is a strong choice for those who want to buy in and wait for a recovery, but investors need to understand that they could be in for a volatile ride if a new variant emerges or the pandemic takes some other unexpected twist. Travel will one day recover, but it is far from certain that 2022 will be any better than 2021 for the airline stocks.