By Claudia Assis, MarketWatch
U.S. airline stocks have been slammed as companies cancel all but urgent travel and avoid regions with high numbers of cases of the coronavirus COVID-19, but investors say the reaction may be overdone.
The selloff is purely motivated by fear, said Michael Matousek, head trader at investment manager U.S. Global Investors. But U.S. carriers have healthy balance sheets and offer a good product, and with summer round the corner, leisure travelers should help pick up the slack, he said.
“Are people going to stop going on vacation? No. Will businesses stop travel in perpetuity? No,” he said.
Airline stocks were walloped on Thursday, after Southwest lowered its first-quarter guidance due to a “significant decline in customer demand, as well as an increase in trip cancellations”, as well as the bankruptcy of an ailing U.K. airline.
The International Air Transport Association, or IATA, added to the gloom with an estimate that the airline industry globally could take a hit of up to $113 billion from virus-related travel disruptions.
Earlier in the week, United Airlines Holdings Inc. /zigman2/quotes/205037281/composite UAL -2.94% announced domestic and international flight reductions, among other measures, and several air carriers have said they are waiving fees for customers changing or canceling their travel plans.
The S&P 500 airline subindex — comprising Alaska Air Group Inc. /zigman2/quotes/200972303/composite ALK -0.78% , American Airlines Group Inc. /zigman2/quotes/209207041/composite AAL -4.37% , Delta Air Lines Inc. /zigman2/quotes/200327741/composite DAL -1.75% , Southwest Airlines Co. /zigman2/quotes/201071949/composite LUV -1.38% , and United — rose 13% in the 12 months through Jan. 17.
Since Jan. 20 — the week that the first COVID-19 cases outside China emerged, including the first patient in the U.S. — the airlines shares collectively are down about 30%. A bounce on Friday was pinned to hopes that the Trump Administration could step in.
There’s no doubt the carriers’ first-quarter earnings will get a hit, although it is still hard to quantify it, Matousek said. But he’s seeing institutional investors buying on the dip and building their positions, he said, recalling that Warren Buffett’s Berkshire Hathaway Inc. /zigman2/quotes/208872451/composite BRK.A +0.58% /zigman2/quotes/200060694/composite BRK.B +0.26% is Delta’s largest shareholder.
“It’s oversold based on people’s fears,” he said.
Other investors struck a more cautious tone.
“We still consider all four major U.S. airlines” — American Airlines Group Inc. /zigman2/quotes/209207041/composite AAL -4.37% , Delta Air Lines Inc. /zigman2/quotes/200327741/composite DAL -1.75% , Southwest Airlines Co. /zigman2/quotes/201071949/composite LUV -1.38% , and United Airlines Holdings Inc. /zigman2/quotes/205037281/composite UAL -2.94% — as “attractively valued” when considering current share prices relative to their regular earnings power, said Colin Scarola, an analyst with CFRA.
“The trouble is, our investment recommendations pertain to our view of stock performance over the next year. And the next year is looking like anything but normal due to the virus outbreak.”
Plus, things could change pretty quickly with the industry, Scarola said.