Investing in the Lowest Priced Airline Stock

Looking for a great bargain in the market right now in the Aviation sector? When we look at the Air Market Group Aviation Watchlist we notice one of the stocks trading a bit lower than all the others.

Right now at just under $5 a share it can be an asset that can be appealing for someone looking to potentially take advantage of a stock that is right now on sale.

Mesa Air Group is a stock with very low Average trading volume of around 883,964 per every 10 days. The company currently has a market capitalization of 148M and does not provide its investors with Quarterly earnings. Their main business is operating regional air carriers that provide schedule passenger service and airfreight services to commercial airliners.

Operating to 110 cities throughout 37 different states with few international flights to locations such as Canada, Mexico, and Bahamas. Since October 31st, 2020, they reported having a total fleet of 146 aircraft with an average of 342 departures on a daily basis.

Looking back at the last 5 years they have been able to have consistent growth in terms of their net profit margin. As 2020 has been rolling along they have been keeping their investors updated with what the current numbers are and how they compare to the years past. With international travel levels still having a slow recovery due to border restrictions still in place due to the outbreak of COVID-19, domestic travel can potentially be the winner through the struggle.

Mesa Air Group Inc.

Being a younger company in comparison to the legacy air carriers that have been in business for decades gives Mesa Air Group a bit of the underdog title in the market. They are certainly not as large in terms of fleet size, aircraft size, operating agreements and total assets in comparison to other carriers. None the less they have been able to position themselves perfectly for domestic services within the United States.

Mesa Operates all of its flights under American Eagle, United Express, or DHL express under the terms of capacity purchase agreements entered with American Airlines Inc. (AAL), United Airlines, Inc (UAL), and DHL.

As the holiday season is coming around the corner we can expect to see a slight increase in travel as more families will be getting together for various celebrations. In addition the idea of travelling to more remote places that may be less likely visited have become more desired by travelers looking to keep their distances.

In addition from the cargo side we can expect to see a greater demand of products needing to be delivered to remote locations. With companies like amazon offering faster response and delivery times, aviation companies such as Mesa provide service to smaller airports that may only be able to handler smaller aircraft.

Mesa Air Group partners with larger names such as American and United to help service the more underappreciated airports in the nation.

Below is a clean chart showing the previous year and a half of Mesa Air Group (MESA).

Certainly had this been a stock that you were just buying a holding from the year prior there would be some significant loss experienced from the drop which occurred at the start of the year. After seeing price touch as low as $2 a share the market found some stability and then we see price test the $3 price just about every month.

Volume has spiked in the last few days as the Presidential Election has directly impacted the value of stocks across the market with an optimistic bias. The perspective and narrative being spread through the market is that there will be stability and economic growth in the coming years.

There is a narrative that we hear right now is that more benefits and aid will be coming as well to business and individuals financially. This will help keep more jobs filled and as well potentially encourage some more traveling to domestic locations.

Mesa Airlines’ operating performance

In a report released yesterday on November 11th, 2020, Mesa Air group discussed the current operating performance numbers for October 2020.

Showing a 48.2% drop in reported block hours from the previous year has been a direct impact from the COVID-19 pandemic. Only reporting a total of 20,167 Block hours as compared to the 38,901 reported from the previous year.

After having a nice rally in stock value yesterday the market has not shown to be too affected by seeing these kind of negative results. Still up for the day by about 3.2% there is some optimism of the worse being over now.

Operating being reduced to about half is something that they have shown to be able to manage without an issue. As operations begin to pick up again and there is greater demand for travel in the upcoming years then we can start to see total block hours increase as well. Considering that the only major factor impacting their business right now is COVID-19, once the vaccine becomes accessible in 2021 then we can expect to see some more optimism rush into the market.

Taking a practical and mechanical approach

When we look at an asset like Mesa Air Group (MESA) it can be challenging to determine a profitable strategy that is not going to utilize significant amount of free capital. Considering that the asset is not highly active the movements in the stock price may not be as consistent or stable. There may be more volatile and rapid spikes in price when there are surges of active orders entering the market.

Understanding they type of asset you are trading is essential for determining if the trade is worth the risk in terms of capital exposure and time duration.

Overall we can agree that the stock has been in a sideways channel for the last few months unable to breakout to new price levels. With the support at near $3 and the previous resistance being at around $4 we are finally sitting above that range at the $4.2 stock price.

With the stock near its low if the perspective is optimistic that the stock price will rise then there are various ways that we can put on a trade for this bias.

Buying the Stock

Buying the stock for $4.20 a share is the most basic and simple strategy for going long on this stock. Should you decide to purchase 100 shares for $420 dollars it would allow you hold those shares for as long as you wish. Selling the shares at the previous high level of around $10 a share would bring in a net $580 before commissions.

The benefit of this type of strategy is that there you can hold on to it for as long as you desire. The negative with this strategy is that it does not provide cash flow for your account but instead increases your overall equity.

Mesa Air Group (MESA)

Buying the Call Option

Options are assets that have dramatically increased in popularity over the last few years as digital trading has become more accessible. Its important to remember that options have expirations and picking the right expiration can make all the difference.

Should you be looking for a long call option be sure to pick a date far out into the future. You need to allow your asset enough time to hit your desired profit target.

Out of the money calls are going to be cheaper than In the Money calls although they have a lower probability of being In the Money on Expiration. Lower Probability of being In the money means that the price of the option will be lower and as a result may experience a greater increase in value should there be a move in price which is in favor of your option.

An example of a call options that you could buy would be the, Buying 20 Call Options for the $7.5 Strike price with the Expiration date of 16 April 2021 for $35 a contract. Total cost of trade $700. Purchasing the contract on the 12th of November would give you a total of 155 days from expiration

Below shows a chart of 3 different target prices and the potential open profit that could result from taking the position of buying a long call.

Target stock PriceRequired stock Percent GrowthDeltaP/L Open
$10.00139.20%157.156170.04
$8.0095.46%130.853270.04
$6.0047.15%91.061020.74

We can see that the option provides a greater use of your capital in terms of return on investment. This is a great example of how going long with a call option can be a greater use of your capital by allowing you to generate greater amount of income should the stock move in favor of your bias.

It is important to remember that this option expired on April 16th, 2021, meaning that failure to manage this trade on time could result in loss of your entire investment in the option contract.

Selling the Put Spread

Selling a put spread is a great way of putting on a trade with defined risk and defined reward parameters. This strategy involves placing two options trades at the same time as a spread.

ActionExpirationStrike PricePrice
Sell (-1)16 APR 21 $51.45
Buy (1)16 APR 21$2.5.30
Net Credit:1.15

This type of trade is a credit spread. Meaning that the way the broker is process the trade brings in a credit of $1.15 into your account. Should the stock trade above $5 a share on the day of expiration you are able to collect the entire value of the credit.

Should the stock price begin to drop down in value the maximum loss that you can experience is the difference between the two strike prices minus your credit. Which brings us to a max potential loss of $1.35 ($5 – $2.5 = 2.5; $2.5 – $1.15 = $1.35).

The benefit of these types of trades is that you are getting the credit of the spread in your account on the front side of the trade. As the option starts to reach closer to expiration Theta looses values and the option then begins to decay. This means that now time is on your side instead of working against you.

Need more info?

Still have some questions or not sure how to set up one of the trades that we went over in this blog post? Send in your questions to Info@airmarketgroup.com and we will do our best to help you out.

Want to read more articles like this one?

Be sure to sign up for our newsletter where we email you market updates and trade ideas for the aviation industry.

Processing…
Success! You're on the list.

From the only exclusive aviation trading community thanks for flying with us!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: