Airline stocks, like United Airlines (NASDAQ:UAL) were solid opportunities, as global economies began to reopen. UAL stock seemed well on its way to recovery, and it wasn’t alone.
- American Airlines (NASDAQ:AAL) exploded from $10.58 to $22.80.
- Delta Air Lines (NYSE:DAL) ran from $23.72 to $37.24.
- JetBlue Airways (NASDAQ:JBLU) ran from $8.85 to $15.62.
- United Airlines ran from $26.13 to $48.95.
- Southwest Airlines (NYSE:LUV) rocketed from $28.75 to $42.35.
Unfortunately, the party is over for the airlines, especially with “second wave” coronavirus fears making the rounds.
Just days after reopening, Texas has seen three consecutive days of record-breaking COVID-19 hospitalizations. On top of that, nine California counties just reported an uptick in cases or hospitalizations. Florida is seeing a new surge of cases, too. If we begin to see a larger resurgence of cases, there’s fear the U.S. economy will be forced to shut down again.
That being the case, it’s best to avoid top airline stocks like United Airlines for the foreseeable future. Near-term, the UAL stock could easily retest its recent lows of $18.18 set back in May.
The Good News Is Fading Fast for UAL Stock
With “stay at home” orders lifted across the U.S., travelers returned to the skies in droves. In fact, according to the Transportation Security Administration (TSA), 430,414 people passed through its checkpoints this week. That’s nearly 400% more than the 87,534 that went through checkpoints in April.
The problem is the good times may not last, with a second wave of the coronavirus likely.
In addition to Texas, California, and Florida, coronavirus hospitalizations are exploding in Alaska, Arkansas, Kentucky, Mississippi, North Carolina, Oregon, South Carolina, and Utah.
Experts at Johns Hopkins University are warning of another severe breakout, especially with recent riots and protests, state reopening, and a good number of people failing to socially distance themselves.
“There is a new wave coming in parts of the country,” Eric Toner, a senior scholar for Health Security said, as quoted by Bloomberg. “It’s small and it’s distant so far, but it’s coming.”
If we see a resurgence, it could force the global economy to close yet again, greatly impacting air travel all over again. In fact, that fear is why shares of United Airlines just slipped from a high of $48.95 to $35.50 in just days. Unless something miraculous happens, and the coronavirus just disappears, shares of UAL could easily fall back to May lows — or even lower.
Stretched Valuations Are a Problem
One of the top reasons the UAL stock has rebounded is because of improved passenger traffic on lifted “stay at home” orders. However, if we’re about to get hit with another round of the virus, traffic could plunge with the stock.
Plus, we’re beginning to see stretched valuations with airline stocks. In fact, that’s why JP Morgan analyst Jamie Baker just cut his forecast on the UAL stock.
He added that the recovery in travel demand and the steady flow of passengers could fall, “as corporate demand potentially proves slow to backfill summer leisure trends,” as quoted by Investor’s Business Daily.
In addition, Baker expects a 90% revenue decline in the second quarter for United Airlines, Delta, and American Airlines. He also sees a third-quarter revenue decline of 75%, and a fourth-quarter revenue decline of up to 50%.
The other fear is that airlines will again run into liquidity issues, and the potential for bankruptcy should the world get slammed with another coronavirus spread.
The Bottom Line on United Airlines
If you made money on the United Airlines recovery, that’s great. However, greed is beginning to turn back into fear, which could send airline stocks like United Airlines back to recent lows.
The best course of action right now is to sell the UAL stock, and wait for the madness to dissipate. Eventually, United Airlines will present itself as another solid “blood in the streets” opportunity. Sell, and wait for the fear to die.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, he did not hold a position in any of the aforementioned securities.