Is It Time to Dump Virgin America?

In a recent article, I advised investors to buy three airline stocks for the earnings season. JetBlue (JBLU), Volaris (VLRS), and Virgin America (VA) were my favorite picks heading into earnings and the stocks have moved higher following good earnings release.

All my recommendation were only for the short-term and I have already recommended investors to book profits by selling Volaris, which is about 15% higher since the time my article was published. In this article, I will be taking a look at Virgin America.

Good earnings

In the latest reported quarter, Virgin America reported earnings per share of $1.20, in-line with the analysts’ estimates.
On the revenue font, Virgin America’s top-line grew 5.2% year over year, but fell just short of the analysts’ estimate by $0.69 million.

The earnings report was not extraordinary but shares of Virgin America still edged higher to over $30. Shares of Virgin America were beaten down prior to the earnings report and all the bad news was already baked in the share price which is why the stock is edging higher following the results.

Despite the decent results, I think investors should book profit and sell the stock. The primary reason why I think investors should sell Virgin America is the growing price competition among airline companies.

The increasing threat of price wars has been spooking investors away from airline stocks and with oil price still expected to stay low, investors can expect the same to continue.

Bear Market

As I have explained in my previous articles, I expect the current market to continue its downward trajectory. For this reason, I think investors should use the recent rally to sell the stocks and book a profit.

The airline industry is cyclical and the stocks in the sector tend to underperform during a bear market or a recession. For this reason, I think shares of Virgin America will underperform heading forward and investors should use the rally to book profits.

Conclusion

Shares of Virgin America have moved higher following the company’s earnings release and I think investors should use this as an opportunity to book profit. The growing price competition in the aviation industry will put pressure on Virgin America’s unit revenue, which in turn can push the stock a lot lower from the current levels. For these two reasons, I think investors should use the recent rally in the stock to take profits off the table.
Published on Feb 19, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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