American Airlines Group Inc (AAL): Are Hedge Funds Right About This Stock?

After a year of extremely low fuel prices and strong airline traffic, most airline companies have witnessed their margins and bottom-line results improve significantly. With persistently low fuel prices throughout 2015, some investors and analysts wrongly anticipated that airline stocks would skyrocket to unimaginable levels. Those airline “bulls” turned out to be wrong, as the NYSE Arca Global Airline Index, which tracks the airline industry, is down by nearly 1% over the past 12 months. This figure would have been even worse if not for the gain of almost 12% achieved in the past month. So why didn’t airline stocks skyrocket as some investors previously anticipated? What were investors worried about? It appears that most investors were concerned over the declining PRASM metric of most airlines, which denotes the passenger revenue divided by available seat miles. In other words, investors were worried about the toughening price war among airlines, which has been partly fueled by lower fuel prices. That being said, let’s now take a look at what billionaires and hedge fund managers think about American Airlines Group Inc (NASDAQ:AAL).

American Airlines Group Inc (NASDAQ:AAL) has experienced a decrease in support from the world’s most elite money managers in recent months. American Airlines was in 76 hedge funds’ portfolios at the end of December. There were 77 hedge funds in our database with AAL holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as McGraw Hill Financial Inc (NYSE:MHFI), PPG Industries, Inc. (NYSE:PPG), and Mylan Inc. (NASDAQ:MYL) to gather more data points.

To the average investor there are a lot of formulas stock traders can use to appraise their stock investments. A duo of the less known formulas are hedge fund and insider trading activity. We have shown that, historically, those who follow the best picks of the elite fund managers can outpace the broader indices by a very impressive amount (see the details here).

As already mentioned, the U.S. airline industry greatly benefited from lower fuel prices in 2015. Nonetheless, this advantage was somewhat offset by a decline in top-line results due to lower airline passenger yields. Recent data shows that U.S passenger revenue and yields for the first three quarters of 2015 declined relative to the same period of 2014. Even so, the low crude oil price environment is anticipated to boost airline operating margins to the highest levels in the past several decades. It is a known fact that the airline industry is highly competitive, so American Airlines Group Inc (NASDAQ:AAL) had to compete with its peers on a market-by-market basis through various price discounts, adjustments in pricing structures, target promotions and loyalty program initiatives. It should be noted that AAL’s aircraft fuel expenses totaled $6.23 billion in 2015, down from $10.59 billion registered in 2014. More importantly, fuel expenses accounted for only 21.6% of the company’s total mainline operating expenses in 2015, compared to a figure of 33.2% registered in 2014.

Keeping this in mind, let’s take a look at the recent action surrounding American Airlines Group Inc (NASDAQ:AAL), as well as discuss the company’s revenue growth in 2015.

Let’s now take a brief look at American Airlines Group Inc (NASDAQ:AAL)’s top-line figures of the past two years. The airline’s total operating revenue reached $40.99 billion in 2015, notably below the $42.65 billion that it reported for 2014. The company’s mainline and regional passenger revenue totaled $35.51 billion in 2015, down by 4.3% year-over-year. The decline in revenue was primarily attributable to a decrease in passenger yields due to toughening competition in certain domestic markets, as well as sustained economic weakness in Latin America, especially in Brazil and Venezuela. AAL’s mainline and regional passenger revenue per available seat mile (PRASM) was $0.1321 in 2015, which marked a decrease of 5.4% year-over-year. Nevertheless, the company’s bottom-line reached a figure of $7.61 billion in 2015, which was substantially higher than the $2.88 billion in net income generated during the prior year.

What does the smart money think about American Airlines Group Inc (NASDAQ:AAL)?

Heading into 2016, a total of 76 of the hedge funds tracked by Insider Monkey were bullish on this stock, a decline of 1% from one quarter earlier. With the smart money’s capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their stakes meaningfully (or had already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, James Dondero’s Highland Capital Management has the most valuable position of call options underlying shares of American Airlines Group Inc (NASDAQ:AAL), worth close to $222.8 million, comprising 7.1% of its total 13F portfolio. Sitting at the No. 2 spot is Stelliam Investment Management, managed by Ross Margolies, which holds a $149.4 million position; the fund has 4.5% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that hold long positions include Phill Gross and Robert Atchinson’s Adage Capital Management, and Israel Englander’s Millennium Management.

Due to the fact that American Airlines Group Inc (NASDAQ:AAL) has experienced a declination in interest from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of hedgies who sold off their positions entirely last quarter. At the top of the heap, Matthew Hulsizer’s PEAK6 Capital Management dumped the biggest stake of the “upper crust” of funds watched by Insider Monkey, worth close to $32.4 million in stock, and Anthony Bozza’s Lakewood Capital Management was right behind this move, as the fund sold off about $28.3 million worth of shares. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 1 fund last quarter.

On the final page, we’ll compare AAL’s popularity to stocks with a similar market cap.

Let’s now take a look at hedge fund activity in other stocks similar to American Airlines Group Inc (NASDAQ:AAL). These stocks are McGraw Hill Financial Inc (NYSE:MHFI), PPG Industries, Inc. (NYSE:PPG), Mylan Inc. (NASDAQ:MYL), and V.F. Corporation (NYSE:VFC). This group of stocks’ market caps are closest to AAL’s market cap.

As you can see these stocks had an average of 41 hedge funds with bullish positions and the average amount invested in these stocks was $2.03 billion. That figure was $2.10 billion in AAL’s case. Mylan Inc. (NASDAQ:MYL) is the most popular stock in this table. On the other hand V.F. Corporation (NYSE:VFC) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks American Airlines Group Inc (NASDAQ:AAL) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers and that it may finally be poised for a breakout, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

Disclosure: None