Has the right time come to start buying the stock at such a huge discount?

Founded back in 1925 in the United States, Delta Air Lines, Inc. (DAL) is the second biggest airline company in the world by number of passengers carried, as well as by revenue-passenger kilometers flown and fleet size. Delta is one of the four carriers that control the majority of the US aviation with its 60% share of the domestic market. The company operates over 5,400 flights daily, serving 325 destinations in 52 countries around the globe.

Financial performance, Q1 2020 results, coronavirus impact & expectations for the future

With the demand for air travel remaining very strong, the company’s passenger revenues accounted for the majority of Delta’s revenues (89.9%) in 2019. The remaining revenue has been generated by the company’s cargo services and other sources. In 2019, 87% of the company’s passenger revenues have been generated through ticket sales, while royalty travel awards and travel-related services accounted for 6.9% and 5.8% of passenger revenues.

In 2019, Delta reported that 71.8% of its passenger revenues have derived from its domestic activities, while its operations in the Atlantic, Latin American and the Pacific regions accounted for 15.1%, 7.1% and 6% of 2019’s revenues respectfully.

Delta reported a loss of $0.51 in the March-ending quarter this year, which was still better than what analysts had expected (-$0.72). The company had reported earnings of $0.96 per share in the same quarter of last year, driven by high air-travel demand at the time. Yet, due to the coronavirus outbreak and the fact that the airports have been closed for a few months and flights have been cancelled, the company took a significant hit as airlines were among the biggest losers during the pandemic. A significant decrease in revenues and profits for the company during the first quarter were inevitable and only logical taking into account the coronavirus outbreak and the negative consequences caused by the virus.

The company is reportedly expecting tough times in the 2nd quarter of this year as the virus has continued weighing extremely negatively on the airline’s business. In fact, the company’s financial performance has been extremely strong in the past few years and it has managed to continue increasing its revenues on a yearly basis and the net profits have been rising, growing its shareholders’ wealth. Besides the tough 1st quarter of 2020, Delta has still shown a very solid performance that could also be seen by looking at its return on equity (RoE) of 26% and return on assets (RoA) of 6%. Furthermore, the company’s book value per share is currently standing at $22, bringing the price to book value to only 1.12x. In other words, the huge depreciation of the price that sent the stock from the February highs at $60 before the coronavirus outbreak towards the $20-$25 lows has made the stock extremely cheap and is giving an opportunity for investors to start buying the leading airline stock at a 67% correction from its highs. Moreover, the company has had an impressive record of dividend payments over the years, returning $2.5 – $3 billion to shareholders in the past few years.

It is important to say that the situation with the virus has started improving slowly but surely all across the globe and there are many pharmaceutical companies out there working hard towards producing a vaccine that is expected to come out at some point in 2021. Furthermore, many countries (especially in Europe) have already started opening their borders and operating different domestic as well as some international flights. All this being said, even though it will take time for Delta to reach the revenues and profits it used to report prior to the pandemic, we are positive that the company’s business will start recovering soon and the leading airline will continue making more money for its shareholders in the future.

Technical analysis – does the company look attractive at these low levels and could that be a great buying opportunity for investors?

By looking at the chart and the historical price movements, we should mention that based on the company’s strong financial performance over the past few years the stock price has more than doubled since June of 2016 when it was trading at the $30 lows to reach the $62 highs in the beginning of 2020, just before the coronavirus outbreak and the negative consequences we have been observing in the past few months. The company’s large cash pile over the past few years has given an opportunity for a few stock buybacks that the company has been doing in order to further boost its share price and maximize its shareholders’ wealth. Stock buybacks are one of the easiest ways for a company to invest in its own stock and help boost the price higher, which is very favourable for investors that own the stock, as they are able to make more money to the upside and get a better value for their investment.

The company has actually been in a very strong uptrend in the past 11 years since 2009 when the stock was trading at only $5 after the financial crisis of 2008 and investors have been appreciating the great financial performance of the company ever since, which has logically reflected on its share price performance.

The worst days for the stock were in the period between the middle of January 2020 and the 19th of March when the stock lost 67% of its value, dropping towards the $19.50 lows. Yet, smart money has started coming in and intelligent investors have been appreciating the huge buying opportunity that the stock has offered at the $19.50 lows and the huge sell-off managed to come to its end in the end of March. In other words, investors started buying aggressively at the $19.50 and that has already reflected positively on the stock, sending it up to the $28 highs in the end of May.

In fact, intelligent investing is the process of buying undervalued stocks with a great financial performance at a huge discount, which then gives an opportunity for investors to make a lot higher profits to the upside when the stock starts recovering. Well, taking into account the strong financials and the impressive performance the company has had over the years, together with the huge depreciation of the stock lately and the positive expectations for the future in terms of the coronavirus outbreak and the recent positive news coming out from many countries around the globe, we remain positive for the stock in the future and believe it will give a chance for our followers to buy at this huge discount and make high profits when the price starts recovering.

Chart: Delta Air Lines, Inc. (DAL)

As you know, our approach to the market is based on our Dow Theory 2.0, which gives us a chance to get a confirmation of whether a particular investment is worth going for only if we get a confirmation from some of the biggest ETFs out there that have got the stock within their portfolio.

XLI – Industrial Select Sector SPDR Fund

In order to get a confirmation whether DAL is a good investment opportunity around the current levels, we will firstly look at one of the biggest ETFs out there that invests in the stock – XLI (Industrial Select Sector SPDR Fund), where Delta accounts for 1.38% of the fund and plays an important role for the ETFs’ overall performance.

The daily chart clearly shows the huge depreciation of the XLI between the middle of February and the 23rd of March this year where the leading ETF’s stock dropped from the $85 highs to the lows at $47.70 (44%), following the whole stock market sell-off all across the globe. Yet, investors have seen the great opportunity of buying the XLI at the $47 lows, which gave them a chance to own the fund that invests directly in the world’s leading industrial companies, such as Boeing, Honeywell, General Electric, Caterpillar and others, expecting a recovery on the stock market, which will then boost their investment returns.

Thus, the XLI started recovering its losses where investors managed to boost the stock price towards the $70 highs in the end of May.

In other words, the positive investment sentiment has definitely increased over the past 2 months and now the smart money has started flooding into the market, giving signals for a definite recovery from the huge sell-off that had occurred lately.

The RSI, Stochastics and Bollinger band indicators have also been giving lots of indications that the XLI had been extremely oversold at the levels around $47-$48, signaling for a great buying opportunity at those levels. The price failed to break the $71-$72 resistance level and that has motivated investors to start cashing in some of the profits they have made to the upside. Therefore, we have seen a bit of a profit-taking interest in the short-term, which has sent the price towards the $67 where it is currently trading.

Yet, we believe the XLI remains strongly bullish and it is expected to find further buying activity as it tests the key support mark at $64.50, which used to be a resistance that was broken during the huge buying activity that has taken place lately. Furthermore, the horizontal support at that mark matches perfectly with the diagonal support that has been created since the price reached the $47.70 lows after the correction to the downside. In other words, a lot of buying pressure is likely to take place at around the $64.50-$65 levels where investors would be pushing the price higher afterwards.

In fact, this clearly confirms our bullish stance on the DAL stock and gives us an indication for a very likely bullish continuation from the current levels.

Chart: XLI (Industrial Select Sector SPDR Fund)

In order to be even more comfortable with our bullish expectations for the DAL we would be analyzing the performance of the SPY (SPDR S&P 500 ETF Trust) due to the fact that the correlation between the XLI and the SPY is 94% and it is one of the strongest correlations between the world’s biggest ETFs out there.

SPY (SPDR S&P 500 ETF Trust)

By looking at the daily chart, one could easily see that the SPY has managed to bottom out from the $220 lows back in the end of March after the huge sell-off caused by the coronavirus outbreak leading to a massive depreciation of the price from the $340 highs.
Yet, the SPY has found its ground at the $220 lows and that has led to a very strong bullish reversal on the price where the SPY has managed to break a few key resistance levels in the past 2.5 months, such as the $263, $280 and $300 to reach the current levels at $308. It is important to say that the whole stock market in the US has been extremely bullish over the past few months after the massive sell-off during the coronavirus outbreak. The market has managed to recover most of its losses, giving indications for further potential bullish rallies in the future. The SPY’s chart looks very similar to those of XLI and Delta. In fact, the technical indicators have also been confirming those strong bullish rallies in the past few months and have continued pointing higher, giving indications for a further bullish potential on the chart. Moreover, the daily chart clearly shows the first horizontal support (broken resistance) at $300 that matches with the diagonal support at that level that has been forming since the price reached the $220 lows on the 20th of March. The technical indicators are signaling for a potential profit-taking interest as they have gone closer to the overbought territory after the huge bullish trend in the past 2.5 months. In other words, we might see a bit of a profit-taking correction to the downside, which would send the price closer to one of the 3 strong support levels – $300, followed by the next one at $295 and the major support level at $280. In fact, we are expecting to see lots of further buying interest once the price reaches those support levels and we believe it will give a great buying opportunity for investors to buy the SPY at a great support after a short-term pullback from its highs, giving them an opportunity to further boost their profitability to the upside.
Therefore, our expectations remain strongly bullish and based on the recent performance of the SPY, we believe it clearly confirms our bullish stance on Delta stock and the great potential it has got to offer to the upside.

Conclusion

Based on the above-stated facts and after analyzing the performance of the XLI and the SPY, we should say we remain very bullish on Delta’s stock for the future. We expect the leading airline company to find its ground after the massive sell-off caused by the coronavirus pandemic and the negative consequences the virus had on the overall economy and of course on the stock market, leading to a huge correction to the downside. The Dow Experts believe all those corrections to the downside could be a great buying opportunity where we can start investing in the world’s leading stocks at a huge discount – an opportunity we hadn’t had for 11-12 years since the financial crisis of 2008. In other words, we would like to use the recent correction in our advantage and that would help us maximize our followers’ profits by buying Delta stock at a 67% discount from the highs the stock reached early this year.

As we have already mentioned above, the technical indicators on all 3 charts we have analyzed today – DAL, XLI and SPY have gone to the overbought territory after the huge bullish rally over the past 2.5 months since the 20th of March. Therefore, we will wait for a short-term correction of around $2 on DAL, which would send the price towards the first support level at $24 where we will start buying the stock aggressively. Should the price make a further correction to the downside, we will be waiting patiently until it reaches the next key support level at $20, where the price started its recovery from back in March and investors have been very active in buying at that level and pushing the stock higher. In case the price reaches the key support at $20 we will be interested in buying more and improving our average cost basis on the stock. In fact, we are expecting to see more buying pressure at those 2 levels and the price is likely to continue its strong bullish appreciation for the next few weeks and months. Our first profit-taking target is set at $30, followed by the longer-term target at $40 where we will be fully cashing in our profits and wait for another profit-taking correction in order to buy the stock again at a discount, which in turn would give us a chance to maximize our followers’ profitability to the upside.



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Sincerely,

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