Why The Shorts Have Exited Major Airlines

Short sellers got out of the way of the major U.S.-based airline stocks in the lead up to the summer travel season and as share prices rose as much as 10 percent to multiyear highs.

The number of shares sold short in American Airlines AAL, Delta Air Lines DAL and United Continental UAL fell by double-digit percentages between the May 15 and May 30 settlement dates.

Short interest also dwindled in Allegiant Travel ALGT while in Southwest Airlines LUV it was essentially unchanged from the previous period.

JetBlue Airways JBLU bucked the trend with a significant rise in short interest. Regional airlines Alaska Air Group ALK, Republic Airways RJET, SkyWest SKYW and Spirit Airlines SAVE grew more modestly in late May.

Furthermore, short interest in manufacturer Lockheed Martin LMT also grew modestly in the final weeks of the month, while that in Boeing BA was little changed.

Below is a quick look at how American Airlines, Delta Air Lines and United Continental have fared and what analysts expect from them.

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American Airlines

The number of shares sold short in this Fort Worth, Texas-based airline dropped more than 10 percent to about 12.02 million, the lowest level of short interest since the newly merged company became public late last year. Less than two percent of float was held short, and the days to cover was a little more than one.

American is expected to post strong growth on both the top and bottom lines for the current quarter. The company has a market capitalization of about $29 billion. The long-term earnings per share (EPS) growth forecast is more than 39 percent, and the return on equity is more than 30 percent.

Of the 17 analysts who follow the stock that were surveyed by Thomson/First Call, 13 recommend buying shares, five of which rated the stock at Strong Buy. Their mean price target, or where analysts expect the share price to go, is more than 14 percent higher than the current share price.

As of the close on Thursday, the share price is up about 62 percent year-to-date. It increased more than five percent in the two-week short interest period. The stock has outperformed not only competitors Delta and United Continental over the past six months, but the broader markets as well.

Delta Air Lines

This Atlanta-based air transportation company saw short interest shrink from about 16.82 million shares in the previous period to more than 13.27 million by the end of the month. That was less than two percent of the float and the lowest short interest year-to-date. The days to cover was less than two.

The consensus earnings forecast calls for marginal year-over-year earnings growth in the current quarter but a decline for the full year. The company's market cap is more than $32 billion, and its dividend yield is about 0.6 percent. The price-to-earnings (P/E) ratio is less than the industry average and the return on equity is very healthy.

All but one of the 18 surveyed analysts recommend buying shares of Delta; six of them rated the stock at Strong Buy. They see room for shares to run, as their mean price target is more than 17 percent higher than the current share price, and that target would be a new multiyear high as well.

The share price rose less than five percent during the period and is now about 47 percent higher than at the beginning of the year. The stock has not only outperformed competitors Southwest and United Continental over the past six months, but the Dow Jones Industrial Average too.

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United Continental

Short interest in this Chicago-based air transport giant declined about 21 percent to 9.38 million shares, the smallest number of shares short in at least a year. That represented less than three percent of the float. At the current average daily volume, it would take less than two days to cover all short positions.

Analysts are looking for strong year-over-year earnings growth in the current quarter and the next. The company has a market cap of nearly $16 billion. The long-term EPS growth forecast is more than 34 percent, and the return on equity is less than 18 percent. The operating margin is greater than the industry average.

Of the 18 analysts polled, 13 recommend buying shares, four of those rated the stock at Strong Buy. A move to their mean price target would represent a gain of more than 16 percent for the shares. That consensus target would be a level the stock has not seen since late 2007.

United Continental shares have climbed almost nine percent during the period, rising above the 50-day moving average, and are now about 20 percent higher year-to-date. But the stock has underperformed competitors American and Delta over the past six months, though it has outperformed the broader markets.

At the time of this writing, the author had no position in the mentioned equities.

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