DAL - Travel Take Me Away! (Part 1 - Delta Air Lines)

2023-08-21 08:00:00 ET

Summary

• Follow along as we discuss a solid thesis for the Travel Sector and its components going forward.
• Then we will analyze one of our favorite picks in that sector via Fundamentals and Technicals.
• What are the risks to this setup and what would make us change our minds?

We like this thesis so much that we are dedicating two separate articles over the next few days to discussing and sharing a few of our favorite setups in the Travel Sector. First is Delta Air Lines ( DAL ) with analysis via the Fundamentals and the Technicals. Then we'll share another pick which may even outperform ((DAL)), so be on the lookout for that one as well.

The Fundamental Thesis With Lyn Alden

"The U.S. economy (and certain other parts of the world), is a tale of two economies. With very high fiscal deficits and public debt-to-GDP, higher interest rates put downward pressure on some parts of the economy, while actually stimulating other areas, as higher interest expense and thus larger deficits flow out into the economy.

The U.S. federal government's fiscal deficit for the first 10 months of the fiscal year (October 2022 through July 2023) was $1.6 trillion . That's twice what it was for the first ten months of last year. The largest component of that increase was the higher interest expense that the government is paying on its debts. So we have to ask the question: who's on the receiving side of those deficits, and particularly who is on the other side of those interest expenses?

One answer is cash-rich corporations like Exxon Mobil and Alphabet that I previously mentioned. But certain households are another answer.

Consider an upper-middle class 65-year old retiree. They own a home outright with no mortgage, or they've locked in a low fixed-rate mortgage. They have plenty of cash, money markets, and bonds/equities. They receive Social Security and Medicare. They're a mini-version of Exxon Mobil or Alphabet.

As the Federal Reserve raises interest rates, it doesn't really affect them negatively at all. In fact, their bank accounts and money markets and T-bills start paying them higher yields , while any debts they have are locked in at low rates for long durations. So, they have plenty of money to spend on travel, restaurants, and other things. And for some of them, they help their children or grandchildren with expenses as well.

The consensus idea that aging demographics are deflationary makes sense historically when senior citizens on average tended to be impoverished. But at the current time, that's where large swaths of the U.S. deficits are going toward: Social Security, Medicare, and Interest Expense (with seniors and their proxies such as insurance companies and pensions on the receiving end of much of that interest). Most U.S. household wealth is still concentrated in the hands of the Baby Boom generation and will be for quite some time.

The travel sector suffered for a while, and so there is still pent-up travel demand. That fact, combined with ongoing fiscal dominance directed at people who have the time and money to travel, is rather constructive for the travel industry and restaurant industry. In other words, a core thesis is to own businesses that upper-middle class seniors want to spend money on. They're the ones that have a large portion of the country's money, and higher interest rates are actually neutral-to-stimulatory for many of them."

---> So, let's work with this thesis and extrapolate a strategy to profit off of the setup.

Lyn also recently offered this comment regarding one of the stocks are now highlighting:

"I normally don't like the business models of airlines (DAL, UAL, LUV) but they are looking pretty interesting at these levels. They fit in with my theme that travel+restaurants are among the stronger parts of the economy these days."

Let's look at Delta Air Lines ((DAL)) and identify the setup. Here is Lyn's current fundamental snapshot:

"Airlines are historically terrible business models, and I'll briefly explain why. When it comes to transportation in general, we can broadly separate companies into two groups.

The first group of transportation companies own their own pathways. An example of this is a railroad; the major freight railroads in the United States have historically been solid performers. This is because once they establish their pathways, they are kind of monopolies, and they have some degree of pricing power. Another example is pipeline companies; they build their infrastructure and tend to have pretty good returns on it, because it would usually be uneconomic for competitors to build a parallel pipe when there isn't enough demand for both to be full. Usually when a pipeline company does poorly, it's because it over-leveraged itself, rather than because its pipes failed to earn decent EBITDA over the long run.

The second group of transportation companies don't own their pathways. Trucking companies, airline operators, and shipping companies (tankers, dry bulk, containers, etc) generally fall into this category. These are more commoditized hyper-competitive businesses, where the overbuilding of trucks, planes, and ships can crush pricing power for long stretches of time. They can all go from point to point and directly compete with each other. In other words, they lack an economic moat. They are trading stocks, not buy-and-hold stocks.

An airline operator buys a lot of expensive planes (depreciating assets that only get worse after they are bought), and then has to compete against other airlines who have the same airplanes, with little pricing differentiation. So, would I want to own an airline stock long-term? No.

But for a trade? If the technicals and fundamentals are both in alignment, their cyclical aspect can provide some explosive moves, up or down."

Zac has a rather bullish chart on a number of airline stocks, including Delta ((DAL)) - let's take a look via the Technicals.

Zac Mannes Shares His Current Views and Setup For DAL

As you can see on the chart above, the next few months may be a little choppy with an upward bias. However, there appears to be a much larger move up in the offing. As labeled on the chart, this is likely to be in a third wave. That third wave in this rally structure should be the most powerful and could potentially carry price to as high as the $105 area or more over the next several months.

Risks : there are always the macro-economic risks that threaten the stocks in the Travel Sector. As well, from a chart-specific viewpoint, should price move below the $36 area, it would have us reassess the near term bullish setup for DAL.

Why You Want To Look For A Wave Three Setup

Avi Gilburt has written extensively over the years for the readership here regarding our preferred methodology. For those familiar with Elliott Wave Theory, you will know that "3rd waves in the Elliott Wave structure are the strongest and most powerful of all the waves", [and as such] " it is the ideal wave to trade " (Avi Gilburt - The Basics Of Fibonacci Pinball).

Commonly, it is in the middle of this 3rd wave that there is a "point of recognition". It is where the fundamentals begin to align with the technicals. The crowd as a whole tends to get behind the move already in motion. These third waves can be quite commanding in their action, many times even extending beyond standard targets.

That is where we find ourselves in the setup for ((DAL)). The current micro pullback from the recent high at the $50 level has cooled off bullish sentiment enough to reset for the next surge higher.

Conclusion

There are many ways to analyze and track stocks and the market they form. Some are more consistent than others. For us, this method has proved the most reliable and keeps us on the right side of the trade much more often than not. Nothing is perfect in this world, but for those looking to open their eyes to a new universe of trading and investing, why not consider studying this further? It may just be one of the most illuminating projects you undertake.

For further details see: