Bank of America upgrades airline stocks on stock-market momentum, but warns the industry is still vulnerable with valuations above pre-pandemic levels

• Bank of America upgraded airline stocks but emphasized that momentum, not value, is driving the higher price objectives.
• Analyst Andrew G. Didora has a buy rating for JetBlue, Alaska Airlines, and Southwest.
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Airline stocks have upside ahead, but investors should be warned that the industry is still vulnerable with many valuations above pre-pandemic levels, according to Bank of America.

In a Monday note, BofA research analyst Andrew G. Didora raised price targets for airline stocks by an average of 15%, but emphasized that momentum, not value, is driving the higher price targets.

Didora raised JetBlue's target from $16.5 to $19.5, citing lower fuel prices, lower competitive supply, and a strong leisure-oriented user base. Didora also raised Alaska Air Group from $60 to $72, which implies a 16% increase from Friday's close, citing the airline's "solid liquidity position relative to peers."

The analyst sees the stocks, among other names, trading higher on stock market momentum in the near-term as investors load up on industries they expect will bounce back as the pandemic eases. However, Didora emphasized that this is a "buyer beware" situation, as valuations may be getting ahead of fundamentals.

"While airline stocks have traded on a re-opening since last fall, momentum continues to drive the stocks near term, leading us to increase our price objectives. But buyer beware, as we see risks to fundamentals in a recovery at a time when most airlines have enterprise values higher than pre-pandemic," Didora said.

"As the market bids up airline stocks into a demand recovery, we see risks unfolding that lead us to believe profits will trail revenues and revenues will trail demand," he added.

High jet-fuel prices and low demand remains an earnings risk, Didora said. Also, airline bookings remain relatively quiet; sales decreased 81% year over year for the week ending February 14.

The analyst holds a buy rating for Air Canada, Alaska Air Group, JetBlue Airways, Mesa Air Group, and Southwest. He also holds an underperform rating for American Airlines, Hawaiian Holdings, Royal Caribbean, and United Airlines.