Today we’re going to address a question that I received from a student. I lecture regularly at the local college and universities here in Ontario. And one of the students asked me, after hearing my presentation on basic technical analysis, we kind of looked at how stocks can go up, go down and consolidate.
One of my favourite ways of buying stocks as I was explaining to the class via a zoom presentation, I like finding stocks that have declined and based and are beginning to look like they’re breaking out. And that’s really an ideal way to catch a value proposition where the stock is not overbought or overvalued. And if the company has a ‘catalyst of reason’ for going up from that terrible situation that it was in before, when it was declining, then we want to see if we can buy into that reason and see if it can recover.
Some of these stocks that we’ve done this summer in the value space, a number of the utilities, oil, and gas and minerals, mining you know, we’ve done very well on these stocks and it’s because of that pattern. Sometimes the market oversells things you can tell when the selling’s over when it consolidates. So, the student asks:
“Well, what about the airline industry as a reopening value type of proposition”?
Let’s look at Canadian Air Canada. Now again, if we go back to the way I look at things, it’s always kind of a phased way of looking at the markets. So the markets in a downtrend, it consolidates, it breaks out and it goes into an uptrend.
It consolidates in a topic formation; it breaks down and carries on with that pattern. So recently with the COVID correction and in particular, the pressure on the airline industry because of travel restrictions and a lack of willingness of customers to actually get in the airplanes. The airline industry has really been bleeding a lot and it crashed hard and it didn’t recover like many other sectors recovered over the summer.
The airline industry is one sector that has not recovered. It went into a pretty nice base, basically over most of 2020 and began to break out. But, recent news of some of the shutdowns and viruses over the recent winter months caused the sector to pull back and Air Canada was not immune to that pullback. But what’s interesting is that if we look at Air Canada, it’s declining lows, its lows are actually not making lower lows. They’re actually fairly stable and you can see these are lining up more or less. And the highs are forming a bit of a triangle where they broke out. This may be a test of that triangle. If I were to draw the trendlines, you can probably imagine that.
I want to keep something in mind when we look at airlines and that is that there is a certain amount of fundamental risk here. They’re bleeding. They may need second-tier bailouts. Most of these companies, especially in the States have received bailouts. I don’t think Canadian companies have yet, but they’ll be needing some bailouts if they even want to exist. So there’s a real risk there. My feelings are, they’ll probably get those bailouts. Second thing is, is that everybody’s counting on the vaccine and I do too with a lot of the stocks that we’ve been buying and including the banks and the oils and whatnot that I’ve talked about kind of nonstop over the past six months.
But the other thing that we’ve got to keep in mind is if these vaccines are slower to come out, then the industry, the airline industry is particularly sensitive to that because it’s the one area that everybody’s got to bunch together in a great big bus and go through the air and breathe everybody’s air. Right? The other thing is that if people are still hesitant, despite the vaccines, despite some emergence into a normalized life, perhaps the airline positive traffic will be lower, as people are hesitant to travel. So you’ve got to keep that in mind. To imagine that we’ll go back to the highs of 2020 might be a bit aggressive. My question is could they get somewhere near that and perhaps, into this area of resistance, which would be in the low thirties, and that’s not a bad trade from the low twenties.
I’m going to take a look at a couple of other airlines. This is American Airlines, the big, big guys in the States, and you can see some sort of pattern, of a pretty healthy downtrend to begin with and then a crash, whereas Air Canada was moving up prior to that, but a consolidation and it starting to recover. If this stock can break, $18, which seems to be a bit of resistance right now, my target might be low to mid-twenties, possibly as high as $30. So that’s a pretty good upside again, it’s a contrarian play to be sure. So, there are risks, but there are potential rewards.
Now, this airline is Jet Blue. Jet Blue is actually recovered. You’ll notice the pattern on this is far more constructive than the last two we looked at. It’s literally back into its old zone of resistance. The opportunity may not be quite as high with Jet Blue. It probably has a possibility of getting to the upper end of that zone, which is in the $20 area. It’s already trading near 17, still fairly good, but I’m thinking that maybe if I was going to be a contrarian and play this sector, I look at the ones with the greatest opportunity.
And one of the ones in addition to the first two, we just talked about that maybe has the greatest opportunity. In fact, I probably, if you held a gun to my head at this and say it would be this one and perhaps Air Canada would be my two favourite charts is United. And you can see, a pretty nice trend there. Like it’s actually a nice trend line. So my thoughts are that if this manages to break, 50 bucks heck, really aggressive investors could try to buy on a $45 breakout.
We might see anywhere between 60 and as high as the high seventies as the recovery. Now there’s a lot of if’s there, as I said, the passengers may not come back and these guys probably need a bailout. So there’s, there’s no certainty that this is going to be a good trade.
It’s probably best that these kinds of stocks are looked at as aggressive, risky plays. And in fact, at ValueTrend, we have an aggressive growth strategy that is different from our conservative strategy. And if we end up buying the airlines, we haven’t bought any yet, but I am strongly considering them. If we end up buying the airlines, we will only put them in our aggressive strategy. This is not for the conservative investor, because you could lose money. If these guys don’t get the bail, or if people don’t get back on planes.
Well, thanks for listening. That’s enough for today and I will be back in a week. And I just wanted to mention that these kinds of ideas are the types of ideas that we at ValueTrend are constantly exploring. And if you take a look at our performance you will notice in the aggressive platform, for example, we’ve had a pretty good performance in the past number of months because of this kind of trading we’ve been doing. And our equity platform is a very consistent platform.
If you like the idea of sector rotation of value type investing with a real strong bias towards technicals, then we’re your people. We’re also by the way, very, very good in bear markets. Our strategy tends to work well in choppy down or sideways markets. They’re not indexers and we’re not afraid to hold cash. So thanks for listening. And I hope you have very successful trading in your coming days.
