Alpha. Beta. Gamma. DELTA

Delta Airlines

Market momentum is Red. Investors are panicking a little ahead of earnings season. Markets continue negative patterns as little cash comes off the sideline. Volumes remain very low ahead of earnings and the upcoming Consumer Price Index (CPI) and Producer Price Index (PPI) set for this week.

One of the questions I receive quite often is to define “Delta” when trading. If you’re trading options, Delta is a theoretical measurement. It tells you how much the option will go up or down based on a $1 move either way by the underlying stock. We measure Delta from -1 to +1. It’s a very important lesson for traders looking at pricing. 

But that’s not the Delta that I want to discuss today. There’s another Delta in the market… and it’s setting up for a very turbulent week. 

Earnings Preview

We are kicking off earnings season this week. Tomorrow, PepsiCo (PEP) will offer its numbers from the June-ending quarter. On Thursday, banks will start their rounds of reports. Sandwiched between those days is the earnings report for Delta Airlines (DAL). I think this is the most important report of the week. 

The global airline industry is facing a lot of challenges. There’s a massive pilot shortage that is still in the early innings. After COVID-19, airlines gave early retirement to many staff, while others simply left the workforce and moved on to new careers. Airlines are also under pressure from a chaotic travel schedule. So many cancellations occurred in recent months that the Department of Transportation ordered carriers to stress test their summer flight logs or face potential fines. 

Then, there’s the rising cost of jet fuel, which has surged to record levels in 2022 thanks largely to supply constraints in the oil markets, high blending costs, and rising diesel costs. And, of course, it appears that we are still a long way from business travel returning to pre-pandemic levels, especially as companies face cutbacks and recessionary worries. 

Delta Will Set the Tone

I believe that Delta is the one company with the best balance sheet, likelihood of recovery, and market-leading positioning. Its rival American Airlines (AAL) has a dismal balance sheet, and might be looking at further weakness in the future. Delta had a good start to the year, but it didn’t report any positive net income during the first two quarters of the year. Shares are hovering near their 52-week low after pulling back from annual highs above $46.

Because Delta reports first from its cohort, it will set the expectations for the rest of the industry. I’m paying very close attention to updates among analysts who cover the space. Barclays has just reiterated that DAL is a buy with a price target of $45.00. Raymond James has a $50.00 target, while Evercore ISI suggests $56.00.

There will be plenty of updates over the next 72 hours from Wall Street. For now, I think Delta is worth speculation, but I’d prefer to own it at a much lower level. I’ll show you how I plan to trade the stock tomorrow… by using out of the money credit spreads. 

What About The Banks?

I said that I’d recommend a handful of banks ahead of earnings season. But I assure you – you won’t find Goldman Sachs (GS), Morgan Stanley (MS) and other mega banks. 

Instead, we’re going to look in the mid-tier. There are five stocks trading above a market capitalization of $500 million… And trade at a price-to-tangible book value under 1. 

  • Flagstar Bancorp (FBC)
  • Customers Bancorp (CUBI)
  • Northfield Bancorp (NFBK)
  • Luther Burbank (LBC)
  • Flushing Financial Corp. (FFIC)

Remember, when a bank trades under a tangible book value of 1, it’s effectively trading for less the sum of its parts. I’m specifically looking at banks that will be attractive takeover target for the years ahead. These are the types of stocks that you want to own. Then never look at them.

Buy them, hold them, and wait for consolidation in the space. Over the last 35 years, banking consolidation has occurred at a roughly 3% to 5% pace. These stocks will be potential takeout targets in a space that we need… Banks aren’t going away. Take advantage of these names.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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