Airlines are getting slammed ahead of Delta earnings, but they could see a turnaround

You could say the recent run in airline stocks has been turbulent at best.

Shares of Southwest, American Airlines, JetBlue and United fell Tuesday, with Delta the only name in the S&P 500s airline industry group to close the day positive. So far this year, the sector has largely fallen out of favor; Southwest, Alaska, American and Delta are all firmly in bear market or correction territory. And as far as S&P industry groups 2018 performance go, only tobacco stocks beat out the airlines to the downside.

Some traders and strategists, however, see the potential for a turnaround in store as investors look to Deltas quarterly earnings report, scheduled for Thursday.

The group looks like a buy at this juncture as investor sentiment has become so depressed, said David Seaburg, head of sales and trading at Cowen.

I think weve gotten to the point with airlines where it feels like investors are just giving up. We saw oil prices obviously going higher, jet fuel costs are obviously going higher as a result and youve seen capacities start to ratchet up as well, since the fourth quarter of last year. So were at the point right now where it feels like investors are just saying mercy, Seaburg said Tuesday on CNBCs Trading Nation.

Much of the analyst communitys commentary on the airlines has been fairly negative as oil prices have rocketed higher in recent months, said Stacey Gilbert, head of derivative strategy at Susquehanna. But that may indicate an upside surprise ahead.

The options market is implying a move of roughly 4 percent in either direction for Delta shares on earnings, Gilbert said Tuesday on “Trading Nation,” which is a bit larger than is typically seen. The directional flow of Delta options is largely call buying, which would suggest rather bullish investor sentiment ahead of the report.

This flow would suggest that, “maybe the worst is out there, given the Delta Airlines commentary previously. But were also seeing call buyers in other airline names, like American Airlines for example, where theres continued call buying. So I do think its worth highlighting that yes, the news out there has certainly been negative. Yes, the tone out there is negative. But in terms of directional sentiment, were seeing more contrarian players saying the worst has been priced in and there could be an upside surprise.”

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