American Airlines stock [$AAL] jumped Thursday after the company reported earnings. Shares of American popped as much as 20% in early trading, though recently gave back some of those gains to trade 10% higher at around $18. American’s equity was one of the most heavily-traded issues on Thursday, with more than 196 million shares changing hands.
Southwest Airlines [$LUV] and JetBlue Airway [$JBLU] also inched 1% higher after the carriers both reported Q4 results that beat consensus earnings forecasts.
American didn’t wow investors with its report, but did manage to lose a bit less than the Street forecasted. The carrier divulged an adjusted loss of $3.86 a share, beating estimates for a per-share loss of $4.11. Revenues of $4 billion beat estimates for $3.9 billion. It posted a net loss of $2.3 billion loss, slightly worse than predictions for a $2.2 billion loss.
Those results barely pass as a home-run, but American is the most heavily-shorted airline stock, with 25% of the shares outstanding held short. Consequently, American has become a prime candidate for a short-squeeze, whereby bearish investors must cover those short positions by purchasing shares—putting upward pressure on the stock.
Need a visual aid? Pull up the GameStop [$GME] or AMC [$AMC] daily charts. This hysteria occurs when an army of pajama traders take aim at these shorted stocks, defying the bearish analysts and hedgies, and prompting short-squeezes. Don’t look now, but The Wall Street Journal said American’s stock appeared Wednesday on Reddit’s WallStreetBets thread.
Analysts were quick to depict American’s stock surge as completely defying the fundamentals. The move is “clearly unrelated to its earnings, with short-interest being the only factor that currently matters to stock performance,” wrote Raymond James’ Savanthi Syth.
American’s Q1 outlook delineated no visible improvements—similar to the weak outlook issued by Delta Airlines [$DAL] and United Airlines Holdings [$UAL] last week. American’s route network has more exposure to some strong leisure markets, Syth notes, and it is forging ahead on cost-cutting initiatives for 2021. But it also faces some near-term turbulence, primarily its exposure to Mexico/Caribbean routes, which could be negatively affected by new U.S. testing requirements for all international travelers.
Citigroup’s Stephen Trent dubbed down on his Sell rating on the stock, saying the short-squeeze may be a “retail hijacking in the making.” American has the highest debt load of any major carrier and significant exposure to the weak business travel segment, he adds, and it isn’t distinguishing itself with superior technology or strategy. Alas, American’s ongoing cash burn, $34 billion in net debt, and lack of clarity on bookings “do not seem bullish.”
But he conceded that speculative dynamics are overwhelming traditional analysis. “It seems difficult to make stock recommendations on what seems to be retail investor sentiment, especially when it is hard to conclude that this sentiment won’t change a few weeks from now,” he writes.
Cowen’s Helane Becker echoed that assessment, saying that the American’s stock is “dislocating” from the fundamentals. One perk: American could use the opportunity to issue equity at higher prices, using the proceeds to de-lever its balance sheet. But that would dilute earnings per share even more, assuming they ever arrive.