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Avoid airline stocks, trader says as United Airlines reports $1.6 billion loss

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Trading Nation: United Airlines earnings on deck, here's what traders are expecting

Avoid the airlines.

That was trader Todd Gordon's advice to investors on Tuesday ahead of United Airlines' second-quarter earnings report after the bell. The company reported a $1.62 billion net loss that it attributed to a pandemic-fueled slowdown in air travel demand.

United Airlines shares were down about half of 1% in premarket trading on Wednesday after closing up more than 2% on Tuesday. Executives plan to hold a conference call with analysts to discuss the results Wednesday at 10:30 a.m. ET.

U.S. air travel dropped for the first time since April this week as coronavirus case counts spiked in some areas of the country.

"We're generally avoiding the space," Gordon, a managing director at Ascent Wealth Partners, told CNBC's "Trading Nation" on Tuesday, citing the group's "terrible economics," "high fixed costs" and "very little pricing power."

"We think Delta's best in class, but we do expect bankruptcies across the industry from Covid," he said. "Even pre-Covid, profitability was a struggle, and the work-at-home, stay-at-home environment will only exacerbate that."

Gordon also found some red flags in a chart of the U.S. Global Jets ETF (JETS). 

"We're struggling to hold that $15 support after the short squeeze up to 22," he said. "If we were to break back below 15, that is concerning."

He also called attention to the JETS-S&P 500 ratio in the lower panel, saying the trend lower means "the airlines are moving lower at a faster rate than the S&P."

"They're scrambling to cut costs, they're likely to continue to burn through a significant amount of cash until this demand picks back up, and Warren Buffett, rightfully or wrongfully so, sold his entire position in U.S. airlines. So, for now, we're staying away," Gordon said.

Boris Schlossberg, managing director of FX strategy at BK Asset Management, agreed that airlines had a tough road ahead.

"If you think about the airline business, 10% of travel is business travel, and that's responsible for 75% of profits. And ... most business travel just simply isn't happening," Schlossberg said in the same "Trading Nation" interview.

With most businesses conducting meetings over Zoom — or, for those who must travel, renting or buying fractional shares of jets or finding other means of transport — turning a profit is getting more and more difficult for airlines, he said.

"Given that dynamic where you basically have to chase the lowest common denominator, that very, very price-sensitive customer, [it's] very tough to make money," he said. "Within that parameter, though, I think JetBlue, probably because they're just insisting on quality and maintaining that everybody must wear a mask and creating a standard of trust, is an interesting pick."

Schlossberg also flagged Southwest Airlines, which he said "can execute within this very, very challenging environment" and doesn't rely heavily on business travel.

"But for United and some of the bigger ... carriers, I just can't see how they can make up in volume what they're losing in profit margin going forward," he said.

JETS closed nearly 1% higher on Tuesday and fell slightly in Wednesday's premarket trading session.

Short sellers have taken interest in airline stocks during the market's recovery. Nearly 9% of United Airlines' float was sold short as of Tuesday, while American Airlines had the highest short interest in the S&P 500 at over 28%.

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