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Airline stocks are on watch, and trader says one looks ready to break out

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Airline stocks were in focus Wednesday morning on the promise of federal relief to help stem the damage from the coronavirus.

Delta, American Airlines, JetBlue and Southwest were among the companies who said they had reached a deal to secure a slice of the $25 billion package from the Treasury Department.

Bill Baruch, president of Blue Line Capital, said it pays to be picky here.

"Although no one may perform here over the next, say, through this year or at least the next few months — passenger travel is down here more than 90%, China, which is moving on [from] the virus already, it's not really seeing travel return quite yet — And ultimately, if you were to try and find a name, I think Southwest would fit the bill for this scenario," Baruch said Tuesday on CNBC's "Trading Nation."

Southwest Airlines is down sharply this year, though not by as much as its peers – the stock has dropped 38% in 2020 compared with a more than 50% decline for the rest of the major U.S. airlines.

Baruch said if Southwest can clear $38, its "path of least resistance in the near term" could be a move up to $44. It last traded at $33.40. A move to $44 implies 32% upside.

Steve Chiavarone, portfolio manager at Federated Hermes, said federal support should give the airlines some cushioning from the worst of the economic fallout.

"The airlines and the broader market in general has really benefited from some of the support from the federal government and central bank. You've taken the worst-case scenario off the market which is mass bankruptcies, financial system collapse and I think that the strong rally that you've seen has reflected that. You've taken the tail-risk off," Chiavarone said during the same segment.

However, he still sees the group as too risky and not as favorable as other corners of the market.

"We think that they're still going to face a kind of sharp decline in demand. We think clients or customers are going to slowly come back, particularly for leisure travel. You do have a lot of people out of work. … While we like cyclicals, maybe we like them in other areas other than the airlines," said Chiavarone.

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