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Delta Raises Doubts and Skittish Airline Investors Keep Selling

Atlanta ( TheStreet) -- Airline investors are a skittish lot.

At the very least, they were quick to sell off shares last week when they were disappointed by Delta's (DAL - Get Report) traffic report for June. The continued to sell the shares on Monday.

On Wednesday, Delta shares fell 5% from Tuesday's close after Delta reported lower-than-expected June revenue per available seat mile as well as lower-than-expected margin guidance.

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The decline continued Monday, with Delta shares down $1.03 to $37.57 in late morning trading. Delta shares opened June 30 at $39.18 and closed July 3 at $38.60. During the week, shares rose as high as $40.41 before the decline started.

For the full abbreviated week, Delta shares fell 1%, United (UAL) shares fell 4% and American (AAL - Get Report) shares fell 5%. United and American will report traffic on Wednesday. In late-morning trading Monday, United shares were down 72 cents to $39.16 and American shares were down 95 cents to $40.67.

Year to date, Delta is up 37%, United is up 4% and American is up 61%.

Who are the airline investors? Hedge funds hold an increasing percentage of major airline shares, according to a new report by Stifel Nicolaus analyst Joseph DeNardi, who reviewed hedge fund ownership over the past four years..

"The data indicates that hedge fund ownership has generally risen since 2009 at Delta and Alaska and stayed fairly stable at United and Southwest," DeNardi wrote. "We were somewhat surprised ... we had expected a more meaningful -- and broad-based -- decline in hedge fund ownership."

The report shows that hedge funds own about 15% of Delta shares, up from about half of that in 2009; about 15% of Alaska shares, up from 10%; and about 10% of United shares, down from about 15%. Hedge fund ownership at Southwest has remained in the low single digits throughout the period.

In general, airline analysts said last week's selloff was unwarranted.

Delta reported Wednesday that June PRASM increased 4.5% "as continued corporate and domestic strength offset lower-than-expected international yields driven by industry-wide capacity increases and lower business demand to Latin America due to the World Cup.

"For the June quarter, unit revenues increased 6%, in line with initial guidance given in late April," Delta said.

Cowen & Co. analyst Helane Becker wrote Monday morning that Delta's share price decline should be viewed as a buying opportunity. "The market was disappointed by the unit revenue increase and the comments from DAL that international yields showed signs of decline due to capacity increases," she said. "We believe the industry is still focused on the right things, and although capacity is increasing, revenues are mostly keeping pace."

Following Delta's traffic release on Wednesday, JPMorgan analyst Jamie Baker wrote that he expects " a second half outcome richer than that of consensus (and) broadly consistent with our full-year bullishness." He said consensus was 6% June RASM growth. Also, Delta guided to a 14% to 16% second quarter operating margin, while consensus had been 16%, he said.

On Tuesday, the day preceding the traffic report, Delta shares climbed 2% to $40.31, preceding Wednesday's decline. "Expectations clearly matter and appear to have run unchecked," Baker said.

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

TheStreet Ratings team rates DELTA AIR LINES INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate DELTA AIR LINES INC (DAL) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity, reasonable valuation levels, solid stock price performance, compelling growth in net income and revenue growth. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:
  • Compared to other companies in the Airlines industry and the overall market, DELTA AIR LINES INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Powered by its strong earnings growth of 2400.00% and other important driving factors, this stock has surged by 101.36% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, DAL should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Airlines industry. The net income increased by 2942.8% when compared to the same quarter one year prior, rising from $7.00 million to $213.00 million.
  • The revenue growth significantly trails the industry average of 45.9%. Since the same quarter one year prior, revenues slightly increased by 4.9%. Growth in the company's revenue appears to have helped boost the earnings per share.

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