American Airlines, a Zacks Rank #1 (Strong Buy), is the largest airline internationally. Operating as a network air carrier, the company provides scheduled air transportation services for passengers and cargo.

The stock has begun to display relative strength, breaking out to the upside amid a bullish move that recently pushed shares to new 52-week highs. The price movement is a sign of strength as we approach the New Year. Increasing volume has attracted investor attention as buying pressure accumulates in this top-ranked stock.

American Airlines is part of the Zacks Transportation – Airline industry group, which currently ranks in the top 10% out of more than 250 industries. Because this group is ranked in the top half of all Zacks Ranked Industries, we expect it to outperform the market over the next 3 to 6 months.

Note the favorable valuation metrics for this industry group below:

Image Source: Zacks Investment Research

Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.

It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top industries, we can dramatically improve our stock-picking success.

Company Description
American Airlines operates a mainline fleet of 965 aircraft. The company conducts business through a network of major hubs such as Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, and Philadelphia, as well was through partner gateways in London, Madrid, Sydney, and Tokyo.

Improved air travel demand is aiding the company’s top line. Passenger revenues have been very strong with both leisure and business consumers taking to the skies again. American Airlines is constantly looking to add routes and broaden its network.

President Trump’s re-election is a positive for the airliner. The anticipation of a more relaxed regulatory environment under Trump’s leadership will likely lead to lesser scrutiny, which is expected to boost mergers and acquisitions across the industry.

Earnings Trends and Future Estimates
American Airlines (AAL) has built up an impressive reporting history, surpassing earnings estimates in 8 out of the past 9 quarters. Most recently, the company posted third-quarter earnings of 30 cents per share, a 130.8% surprise versus the $0.13/share consensus estimate.

The network air carrier has delivered a trailing four-quarter average earnings beat of 124.8%. Consistently beating earnings estimates should help the stock mitigate turbulence moving forward.

Analysts are bullish on the stock and are in agreement in terms of earnings estimate revisions, raising estimates across the board. The fourth-quarter consensus EPS estimate has been revised upward in the past 60 days by 42.5% to $0.57/share. If the company is able to achieve this, it would translate to a 96.6% growth rate versus the same quarter last year.

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Let’s Get Technical
This market leader has seen its stock advance more than 70% in just the past 4 months alone. Only stocks that are in extremely powerful uptrends are able to experience this type of outperformance. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.

Image Source: StockCharts

Notice how both the 50-day (blue line) and 200-day (red line) moving averages are sloping up. The stock has been making a series of higher highs into the end of the year. With both strong fundamental and technical indicators, AAL stock is poised to continue its outperformance.

The stock was able to power through a recent technical issue over the holidays. A one-hour halt on Christmas Eve due to a vendor disruption affecting the company’s dispatch and coordination system caused widespread delays. But shares ending up closing in the green as holiday travel is expected to witness record volumes this year.

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, American Airlines has recently witnessed positive revisions. As long as this trend remains intact (and AAL continues to deliver earnings beats), the stock will likely continue its bullish run.

Bottom Line
Backed by a leading industry group and history of earnings beats, it’s not difficult to see why American Airlines stock is a compelling investment. Robust fundamentals combined with an appealing technical trend certainly justify adding shares to the mix.

Recent positive earnings estimate revisions should also serve to create a ‘floor’ in terms of any sudden or unexpected downside moves, helping smooth out the ride for investors. If you haven’t already done so, be sure to put AAL on your shortlist.

— Bryan Hayes

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Source: Zacks