In theory, I understand the allure of investing in a downtrodden company such as United Airlines (NASDAQ:UAL) stock. But in this case, I just don’t agree with it.
The conventional thought for people who chase depressed names is that there’s no better time to buy a stock than when it’s at a bottom. They reason that there’s nowhere to go but up. Surely, they assume, the stock will generate plenty of juicy returns if only we hold on to it long enough.
Of course, that’s the same thinking that’s gotten investors in danger gambling with GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC).
Granted, it’s great to get a name when the stock is at a low point. I’ve done it myself. But the trick to being a savvy investor is the ability to determine which companies are ready for a rebound.
In the case of UAL stock, the rebound is still distant on the horizon.
UAL Stock at a Glance
United Airlines is showing some signs of life these days. But don’t let that fool you.
The stock is up about 20% so far on a year-to-date basis as novel coronavirus vaccinations begin to work their way into people’s arms. Bullish investors are hoping that people will be more comfortable traveling again, soon. They want business travelers to pack their suitcases and start flying around the country.
While the 20% growth may seem impressive, remember that before the pandemic, UAL stock was trading at more than $90. It still has a long way to go to even come close to regaining those losses.
Earnings from the fourth quarter of 2020 didn’t help. UAL reported revenue of $3.41 billion, which missed analysts’ expectations of $3.47 billion. Earnings were a massive loss of $7 per share, which was worse than the -$6.56 estimate that analysts had posted.
A year ago, UAL stock had positive earnings of $2.67 per share. The turnaround has been staggering.
Honestly, a company is in wretched shape when analysts expect a loss of more than $6 per share – and the company fails to clear even the lowest of expectations. It was a bad day for UAL stock.
More Troubles for United
Talk about a bad situation becoming worse. It’s been less than a month since a notable incident in Colorado put United Airlines back in an unwanted spotlight.
An engine powering a United Airlines jet broke apart in midair over a town near Denver. A fan blade ripped off, shearing a second blade. The engine’s outer covering came off the jet and crashed into a residential neighborhood. It’s a miracle that nobody was hurt.
Early indications are that “damage consistent with metal fatigue” was the culprit. Apparently, it’s one of a string of similar problems with that engine type and aircraft types in recent years.
It may very well turn out that United Airlines is as much as a victim as anyone else from the mishap. But that doesn’t keep United from being affected by the bad publicity from such an occurrence.
It’s the last thing the struggling airliner needed.
Business Travel Is a Problem
As I mentioned in a recent article, United Airlines will continue to be wounded by the drop in business travel since the Covid-19 pandemic began.
Investors may delude themselves into believing that business travelers will start flying again soon. But that’s dangerous thinking.
Business travel is expensive. Before the pandemic, it accounted for as much as 70% of airline revenue. But it only generated 30% of the bookings.
Obviously, the profit margin in business travel is much greater than the margin for leisure travelers.
But during the pandemic, businesses turned to video conferences to get work done when travel was not an option. Videoconferencing is a lot cheaper than even the cheapest business class airline ticket. I don’t see business owners who are watching the bottom line to sign off on travel when a videoconference is an effective option.
The Bottom Line
It’s certainly possible that UAL stock will show some modest increases this year. But it’s not a strong bet.
United Airlines made ends meet in 2020 on government CARES Act funding. It borrowed billions of dollars to stay afloat, and it’s still putting together quarters where it posts losses of $7 per share.
If Bill Gates is right in saying that a sizable portion of business travel will never come back, then airline stocks such as United have a long, slow road ahead of them to regain profitability.
There are better ways to make money with a depressed company than UAL stock. This is one you should avoid.
UAL stock has an “F” grade in my Portfolio Grader, where it has a strong sell rating.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.