April 26, 2022

This week we will be looking to take advantage of the current historic trend that’s taking place in the travel industry as seen through major U.S. airline carrier, United Airlines (UAL).

Market Overview

It was a tumultuous week for the market. Here are some of the details …

Last Tuesday the market raced higher, and it felt like we were on the verge of another bull run. Wednesday was mixed as the Dow and S&P 500 were up marginally, while the Nasdaq was weak. And then, Thursday and Friday hope for the bulls fell apart as the sellers came for all of the indexes, sectors and stocks. I’m not going to sugar coat it; it was an ugly close to the week.

By week’s end the Dow had lost 1.9%, the S&P 500 had fallen 2.7% and the tech-heavy Nasdaq had declined 3.8%. Year-to-date the Dow, S&P 500 and Nasdaq are lower by 6.9%, 10.4% and 17.9%, respectively

Earnings woes, interest rates, inflation, and ongoing geopolitical concerns continue to hover over the market. Until we see some clarity, particularly with interest rates and the war in Ukraine, I expect that we will continue to float around in what has been a months-long trading range.

This week we will be looking to take advantage of the current historic trend that’s taking place in the travel industry as seen through major U.S. airline carrier, United Airlines (UAL).

New Recommendation

The Stock – United Airlines (UAL)
Why the Strength
You can say what you want about inverted yield curves, Fed rate hikes and all the other worrisome economic signs, but none of that is being seen in travel, where business trends are booming at a much faster-than-anticipated rate; that’s the reason why United Airlines (and some major travel firms) have shown relative strength of late.

United’s Q1 report was OK, with revenue still down 21% from the same quarter of 2019 (pre-pandemic), partly due to a 19% capacity drop, which contributed to another huge loss. But the reason for the strength was due to what management said about Q2 and beyond, with the CEO saying, “The demand environment is the strongest it’s been in my 30 years in the industry; we’re now seeing clear evidence that the second quarter will be a historic inflection for our business.”

Indeed, United believes it will now be profitable in Q2 and the bottom line will grow from there; analysts expected a Q2 loss north of $3 per share, but now see a profit of 22 cents per share despite the headwinds of rising fuel prices, and the 2023 estimate is up above $7 per share and likely to rise from there. What’s more encouraging is this being an industry trend, with Delta, Alaska and American all saying that March results (tail end of Q1) were strong and Q2 should be great, with the big picture looking like most airlines will finally get back to pre-pandemic operating levels during the next year or two.

The fact that masks are now optional on flights doesn’t hurt the demand picture, either. It’s a solid turnaround story.

Technical Analysis
UAL’s post-crash rally stalled out just above 60 back in March of last year, with new variants of the virus and higher fuel costs causing headwinds; shares didn’t bottom until a year later as the Russian invasion caused prices to spike and the industry was riddled with cancellations. But that was the bottom, and after a snapback, UAL actually touched five-month highs last week despite the market’s implosion. We do think the stock has a chance of counter-trending to the market, so you can start here or (preferably) on dips. Stop—44.5

The Covered Call Trade
Buy United Airlines (UAL) Stock at 51, Sell to Open May 49 Strike Calls (exp. 5/20) for $3.50 or a Net Price of 47.50 or less

Static Return: $150 per covered call (3.16%)

Breakeven: 47.50

Covered Call Return (if assigned): $150 per covered call (3.16%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 47.50 or less. (In this case 51 minus 3.50 = 47.50. Or another example is you could pay 51.50 for the stock and sell the 49 call for 4, which also equals 47.50.)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on May 3, 2022.