A 13% drop in a single session is the stuff of nightmares for most companies, and American Airlines Group Inc (NASDAQ: AAL) is no different. That happened in Wednesday’s session, as the major carrier gave up effectively all its gains since last November. For context, at one point in March, American Airlines' shares had logged close to 50%, but they’ve struggled since then, and yesterday’s drop will have caused further damage to investors’ confidence.   

The catalyst for the plunge was a bearish update from the company itself, as they lowered forward guidance for Q2 adjusted EPS. With it now expected to land somewhere between $1.00 and $1.15, it was well below the $1.27 consensus estimate. However, the negative news didn’t stop there. 

American Airlines: Tightening Margins

American Airlines’ margins are also set to tighten. Q2’s adjusted operating margin is now forecasted to be between 8.5% and 10.5%, well off the previously forecasted range of 9.5% to 11.5%. While the company’s total revenue per available seat mile (TRASM), a key metric for the airline industry, had been expected to fall between 1% and 3%, the expected drop here is now forecasted as between 5% and 6%. 

It was a bad update, and it was the last thing a stock struggling to catch a break this year needed. While American Airlines' shares managed to rally into the close and finish well above their low of the day, they still came within $0.50 of last year’s multi-year low. Around the $10.90 mark, this support line was, and maybe still is, the only thing standing between American Airlines’ shares and their lowest prices from the COVID pandemic. 

Bullish Outlook for American Airlines

But it’s not all doom and gloom, especially for those on the sidelines who love a bargain. Despite the lowered guidance and plunging stock, there are reasons to think this could be a solid buying opportunity. Consider that in the aftermath of yesterday’s update, the team over at TD Cowen immediately reiterated their Buy rating on American Airlines’ shares. Sure, they lowered their price target from $18 to $16, but from where the stock closed on Wednesday evening, that’s still pointing to a targeted upside of some 40%. 

That’s not an upside to be sniffed at. Those of us thinking about getting involved will certainly need an iron stomach, as there’s a fair bit of risk, but accordingly, there’s a fair bit of potential reward. Backing up the entry opportunity thesis is the fact that American Airlines stock has a solid level of support around the $10.90 mark. 

Technical Support

This is where the bears ran out of steam last year during the 60% plunge, and it’s fair to expect the bulls to put up a big fight if shares dip down there again. This level was tested several times in 2020, as the stock started its long recovery rally. It held each time, which adds weight to the theory that it will hold again this time. Don’t forget, it was only last month that American Airlines issued strong full-year profit guidance. 

Technically, there are signs that American Airlines is very undervalued right now. The stock’s 25% plunge over the past two weeks has sent American Airlines' relative strength index (RSI) down to 24, indicating extremely oversold conditions. While those considering a position must take yesterday’s lowered guidance seriously, there’s a compelling opportunity available now that may not last much longer.