Unless you’ve been living under a rock, you know shares of American Airlines soared early today when AAL was referenced on Reddit’s WallStreetBets. This tale of Main Street vs. Wall Street continues alongside the GME, AMC saga still boiling. However, AAL has been a buy and hold since May of 2020 for us.
American Airlines is currently the most shorted U.S. airline with nearly 30% of its 500-million share float sold short, however, we’re long. Additionally, shares jumped today after American Airlines reported a smaller-than-expected fourth-quarter loss. Keeping in mind, in Q4 of 2020, American Airlines reported a loss of $3.86 a share, revenue of $4.03 billion, beating Wall Street estimates.
We’re Not Stuck on the Ground
American Airlines shares have surged recently but they remain below pre-pandemic levels. Moreover, the 50-day line is actually trending upward.
Some are calling this AAL move simply the result of a “massive influx of retail investors seeking to take on hedge funds in their short-squeeze battle.” We disagree. We’ve been holding AAL since Q2 2020 and continue to debate the fundamentals. We also disagree AAL shares are below the buy range, but we do have concerns regarding the volatility; voiced by many investors.
Let’s discuss both perspectives.
- Better-than-expected vaccine efficacy
- Accelerating rates of vaccination (worldwide)
- Standardization of testing in lieu of restrictions
- Better-than-expected economic outlook/stimulus
- Business travel resurgence (healthy markets)
- Personal travel resurgence (record savings)
- Virtual interactions and dispersion of office workers (“self remodification”) and facilities stimulate demand
- Vaccines fail to address new strain(s) of COVID
- Low rates of vaccine deployment or acceptance
- The virus persists as people avoid masks and distance
- Travel restrictions remain despite vaccines/testing\Economy falters
- Business travel lags as companies conserve cash
- Virtual meeting technologies displace future travel due to the cost and/or climate considerations
AAL has a long road ahead however, as the pandemic eases, the airline industry will recover. Not quickly, but it will recover.
On a side note, it’s also troubling that Robinhood has “In light of current market volatility, we are restricting transactions for certain securities to position closing only, including $AMC and $GME.” Our understanding, at the time of writing, Robinhood has also placed restrictions on AAL. Robinhood has been accused of “Market Manipulation”. Let’s dissect that – Market Manipulation is: “…a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market and create false or misleading appearances with respect to the price of, or market for, a product, security or commodity.” I can’t say that we agree with that assessment. Yes, Robinhood provides the method and tools for Retail Investors to squeeze shorts, but “Robinhood manipulated the market” is a different conversation. Unless evidence surfaces detailing where Robinhood as an entity willfully manipulated the market, this might be a stretch. A more fair depiction might be: Robinhood, as a platform, provided exactly what small investors needed to leverage social media to execute a spectacular short squeeze.
In closing, shorting carries fundamental risks that should be known by investors employing this strategy. Institutional investors are fully aware of such, sometimes exponential, risks. It’s a free market. We’re riding this AAL flight a little longer as it soars.
McEnery, T. (2021, January 28). American Airlines shares spike 50 percent after mention in Reddit forum. Retrieved January 28, 2021, from https://nypost.com/2021/01/28/american-airlines-shares-soar-after-mention-in-reddit-forum/
Airlines.org. (2021, January 28). Impact of COVID-19: Data Updates. Retrieved January 28, 2021, from https://www.airlines.org/dataset/impact-of-covid19-data-updates/#
Rich, G. (2021, January 28). Is American Airlines Stock A Buy As Short-Selling Backlash Takes Over Wall Street? Retrieved January 28, 2021, from https://www.investors.com/research/aal-stock-buy-now/