I have written several articles on Delta Air Lines (NYSE:DAL) in the past month. I wrote about why the company and DAL stock will survive over the long term.
For example, the company has plenty of cash and liquidity. In addition, it expects to be at zero cash burn by the end of the year. Moreover, reports came out this week that most airlines plan on laying off people in the fall in order to achieve a cash flow balance.
Recently some have been worrying that no one is going to travel by plane anymore. For example, Barron’s just posted a dire article with the title: “Airline Stocks Are Falling Because None of Us Are Going Anywhere.” Another article implied that analysts are “depressed” about an airline recovery.
That tells me we are close to the point of maximum pessimism. If you are a contrarian, like me, your reflex is to buy stocks in this category. In fact, I have started to average cost down into one airline stock. I believe that DAL stock is one of the companies you should consider buying as well.
A Coronavirus Vaccine Will Change the Outlook
I believe that a coronavirus vaccine will be a panacea for airline travel. CNBC quoted Bill Miller of Miller Value Partners, a famed value investor, making this exact point. He said that by not owning the airline stocks, you are “making a bet against a vaccine.”
Barron’s wrote on Friday, July 10, that this was one reason why DAL stock and other airline shares rose that day. The article reported that the Gilead Science (NASDAQ:GILD) drug, Remdesivir, was 62% effective for severely sick Covid-19 patients. The drug was associated with a 62% reduction in the mortality rate for those patients in a preliminary analysis.
The Wall Street Journal also reported on July 10 that a vaccine could come sooner than expected. A German company, BioNTech (NASDAQ:BNTX), in partnership with Pfizer (NYSE:PFE), could seek a regulatory authority for a vaccine by the end of 2020. In fact, the CEO thinks several hundred million doses could be ready before approval and a billion by the end of 2021.
There is no question that a race is on to produce large amounts of vaccines. Once the public is sufficiently aware of this the proclivity to travel will increase. The vaccine does not have to be universal before hope rises enough to push airline stocks like DAL higher.
What to Do with DAL Stock
These airline stocks will survive in the long run. They are trading on fears of no one ever traveling again. But contrarian investors know this provides an opportunity.
“Invest at the point of maximum pessimism.” That is what Sir John Templeton once said in an interview in Forbes magazine on Jan. 15, 1995.
Therefore, now is the time to consider average costing into DAL stock. The company and the stock are going to survive in the long run. As pessimism begins to wane about the coronavirus, people will begin to travel again. That will push the stock higher.
In my last article on DAL stock, I wrote that it is worth somewhere between the middle of where it traded in Q1. At that time the stock was between $30 and $60 per share.
So at $45 per share, Delta Air Lines is worth at least 55% above where it closed on Friday, July 10 at $29.07. This represents a good return for most investors who are willing to average cost down.
For example, if the stock falls, they will be able to buy more shares at a cheaper price, lowering the overall average cost of the total investment. Patient investors who buy stocks on a contrarian, maximum pessimism basis know how to do this.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.