Airlines are one of those industries that just don’t get any respect from investors. These long-suffering companies have a history of losses and usually carry a lot of debt. Billionaire investor Warren Buffett took notice of these qualities and summed it all up when he wrote, “The worst sort of business is one that grows rapidly, requires significant capital to engender growth and then earns little or no money. Think airlines.” But in an overheated stock market, airlines are just the kinds of stock that actually offer some safety, since they haven’t participated in the rapid run-up, and all it takes is a few positive events to send share prices higher.

History shows that after a market tops, the high-momentum winners that led the advance tend to be the ones that decline the fastest. We saw this in 2000 as tech stocks led on the way up and on the way down. Stocks that lag the general stock market advance tend to lose less or even gain during bear markets. So while the market may not be at a top, I think one airline stock in particular — Fort Worth, Texas-based AMR (NYSE: AMR), the parent company of American Airlines — is likely to make money no matter what the stock market does.

#-ad_banner-#The downtrend in AMR’s stock price looks like it is about to change. Technical analysis supports a much higher price and momentum indicates the time is right for establishing a position.

Fundamentals indicate that the company is well-positioned to prosper even in a declining economy. While other airline stocks have similar fundamentals, the technical position of AMR is what makes it worth buying now. The chart below shows that momentum is moving higher, and that minimizes the chances of falling for the fundamental “value trap.” Strong technicals show that other investors are already buying, so the stock price may continue to go up. (Many value stocks can languish at low prices for extended periods of time, until other investors spot the opportunity. Buying value stocks with high momentum lowers the risk of holding a stagnant position, which is the equivalent of dead money.)

Management has access to more than $17 a share in cash sitting on its books, almost three times the price of the stock. It’s rare to have a chance to buy cash so cheaply. In addition, earnings for the past three quarters have exceeded analyst estimates, indicating the company has become focused on making money. (Big companies like American often seem to lose sight of this priority and pursue growth at any price rather than profits for shareholders.)

The low-earnings estimates reflect a pessimistic view of the company by analysts, and consistently beating those estimates could be showing that the analysts have developed a mistaken impression of management. Several academic studies have demonstrated that positive earnings surprises tend to be followed by stock market gains while analysts catch up to the positive changes being made by the company.

The real story with American Airlines is in that $17 per share in cash, which should help the company survive any type of downturn. The long-term debt is high, totaling about $27 per share, but the short-term debt is relatively low and AMR should be able to refinance at low rates unless rates jump higher. And with the Federal Reserve doing all it can to keep rates down, AMR seems very likely to have access to the money it needs this year.

It’s also important to time your buys so you don’t sit through large losses. Buying American in January, for example, would have been painful. The stock fell by almost 40% during the first four months of the year. Oil gained 20% in this timeframe, and many investors worried about the impact higher fuel costs would have on airline profits. At this point, the concerns seem to be overdone, and the airlines have shown that fewer flights, luggage fees and other changes have helped them maintain profits.

The chart below helps us see that risk is currently low. Prices have fallen since the start of the year, while the market has gone up. Right now, momentum shows the price has probably fallen too fast, and it is due to bounce higher.

 
In the bottom of the chart, we can see the Rate of Change (ROC) indicator, which is the solid-colored green, middle line of the three shown. This indicator measures how fast the stock price is moving and serves as type of speedometer for the stock price. Just like on the highway, going too fast or too slow can lead to problems. I’ve added Bollinger Bands to the Rate of Change indicator to help highlight when the price is moving too fast. These Bands use standard deviations, a mathematical technique designed to show what’s “normal” from a math perspective. They are commonly used by technicians on price charts, but applying them to an indicator like the Rate of Change indicator offers a unique insight into when a buy or sell should be made.

When the Rate of Change indicator moves outside the bands, the general trend of the stock price usually changes direction. In this case, the Rate of Change indicator fell below the lower band and stayed there for more than a month. This is what market technicians call an “oversold condition,” meaning everyone is trying sell at the same time and prices are almost in a freefall. The good news is that when everyone is done selling, it will only take a few buyers to push the price higher. I think that’s already started now, with AMR’s recent upward moves in the past few trading days.

Action to Take–> Traders should consider buying American Airlines now with a stop loss of $6. Risk is limited to about 10%, but the chart shows a price target of $9, offering a potential return of about 35%. Longer-term charts show even more potential upside, and this position may move from a trade to a solid long-term investment.

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