A recent sell-off in airline stocks has created an attractive entry point — but investors should be careful about which names they buy, according to Deutsche Bank. Airline stocks have pulled back about 15% since peaking in mid-July, analyst Michael Linenberg told clients in a note released Monday. That comes as investors attempt to gauge how rising fuel prices, increases in domestic capacity and macro economic uncertainty will impact these companies. In this environment, Linenberg reiterated major carriers American , Delta and United as buys. “As we head into the latter part of 2023, investors should be targeting names that can check the most boxes of the following list: healthy cash flow generation, strong margins, earnings growth, balance sheet de-leveraging, pro-shareholder initiatives, prudent capacity deployment, formidable competitive position, diversified revenue streams, among others,” he told clients. Despite the recent drawdown, American is still up more than 15% this year, while Delta and United have both climbed more than 30%. The NYSE Arca Airline Index is up 16% this year. AAL DAL,UAL YTD mountain The three airlines this year Airline stocks, he said, are discounting a hard economic landing unlike the broader market. Because of these expectations, he said airlines that have the most exposure to high-end consumers will do better and nab a relatively higher valuation. High fuel prices have also been a key driver of downward pressure on these stocks, he said. And the rising prices come as labor costs also increase, while investors wonder if domestic markets are now over supplies. In the short term, Linenberg said investors will focus on how much of the fuel price increases airlines can “recapture” in revenue. Those that have the most diversified businesses and least elasticity in price revenue streams should outperform in this environment, he said. Still, there are some bright spots. Linenberg said the latter half of 2023 will see corporate travel sales nearly in line with 2019. And International markets have outperformed, though he warned that investors should watch China given recent macroeconomic challenges. Beyond these major carriers, Linenberg also had some recommendations in the small-cap space. His favorite buy-rated small airlines include Alaska , Allegiant , SkyWest and Sun Country . — CNBC’s Michael Bloom contributed to this report
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