Why Delta Could Fly All Airline Stocks Higher in a Sector Breakout

With the stock market close to all-time highs, some investors are wondering whether they should lock in their gains or step into some aspects of the market that have not caught up yet with the broader market performance. It is no secret that some sectors have companies that largely move in tandem, and the airline industry usually fits that bill, barring any major accidents or other company-specific drags.

Now that Delta Air Lines Inc. (NYSE: DAL) has told investors that it would come in at the higher end of its prior guidance, there was some renewed excitement in airlines. While the Dow Jones industrials and S&P 500 hit all-time highs in the past week, Delta’s shares are within about 3% of its all-time high. If Delta breaks out to new highs after this week’s earnings, that could lift all airline stocks higher. That said, an “if” is far from a certainty.

Delta generates a current dividend yield of 2.35%, which is higher than the 10-year Treasury note and is actually the highest dividend yield of all major airlines today. It is also the largest of the air carriers by market cap. Its shares were last seen up almost 18% year to date. On top of recently issuing guidance, Delta is set to release its most quarterly earnings results first thing on Thursday, July 11, 2019. The consensus forecast from Refinitiv calls for $2.24 in earnings per share and $12.46 billion in revenue for the second quarter.

Delta recently noted that it sees revenue per available seat mile up 1.5% to 3.5% in the second quarter, and the company has increased its capacity by a greater than expected 4%, for total revenue growth of 8.0% to 8.5%. Its adjusted unit costs, excluding fuel, are said to remain on track for a 1% to 2% gain, and Delta’s per-gallon fuel cost was put in a range of $2.07 to $2.12, compared with a prior range of $2.10 to $2.20.

It’s time to move past raw fundamentals. What will matter in an industry-lifting event, assuming Delta is successful, is that it could pull up the other major American air carriers in a technical breakout. Some technical investors care about fundamentals, but many fundamental investors greatly care about technical analysis. After all, most investors know better than to buy stocks that are falling in a strong market. If there are hundreds of winners in the market, why bother chasing the losers? Still, many investors might be looking for a catch-up trade here, particularly given the relationship between the market as a whole and transportation stocks.

While the rule of following leaders may seem obvious, getting into those companies that just haven’t caught up yet and may surge even more on a catch-up trade can be where real money is made after a rally. If a stock is performing poorly in a major bull market, ask yourself how bad it might be doing if the market was headed down.

Shares of Delta were trading at $59.30 on Monday, in a 52-week range of $45.08 to $61.32 and with a Refinitiv consensus analyst target price of $67.22. What matters here is that Delta is the leader with a $38.8 billion market cap. It is also valued at 8.6 times the current Refinitiv consensus analyst earnings estimate for this year.

The relative airline data has been broken down into legacy and largest carriers first, with regional players after.

American Airlines Group Inc. (NASDAQ: AAL) was trading at $32.61, with a market cap of $14.5 billion. It is valued at less than six times expected earnings per share and is up only about 1% year to date. American Airlines has a 52-week range of $27.02 to $43.89 and a consensus target price of $40.56. It has a dividend yield of 1.2%.

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