In seeking an addition to my retirement portfolio for this year, I decided to consider Southwest Airlines (NYSE:LUV).
Considering an investment in an airline company might seem foolish to some readers. Frankly, they’d be right. In fact, I think it’s outright stupid, with one possible exception — that being the most successful airline in the industry’s history.
As far as I’m concerned, Southwest isn’t in the airline business. It’s in the freedom business. (“You are now free to move about the country.”)
The concept of freedom is how the company’s founder, Herb Kelleher, reimagined airline travel. Kelleher understood from the beginning that if he could accomplish this, and also make his employees feel like partners in the business, he would gain an advantage on competitors like AMR’s (OTC:AAMRQ) American Airlines, United Continental (NYSE:UAL) and Delta Air Lines (NYSE:DAL).
This concept has been built into company culture and advertising. Add in the airline’s short-haul model, simple pricing structure, comparatively low fares and decent fuel hedging strategy, and you have a recipe for success.
Meanwhile, despite 80% of Southwest employees being unionized, there never has been a labor action. That’s because Southwest’s corporate culture puts its employees first, which translates into a successful business — a happy employee performs beyond expectations.
All of that translates into a better experience for fliers.
The American Customer Satisfaction Index consistently recognizes Southwest Airlines as leading the industry in customer satisfaction, which ultimately results in brand loyalty. As far as I’m concerned, Southwest doesn’t even need its frequent flyer program to keep people coming back.
Southwest’s financials are amazing. The company’s cash on hand is equivalent to long-term debt, which is mind-boggling for an airline. It has been free cash flow positive for several years, generating $700 million last year. Heck, it even pays a 0.3% dividend.
The one thing that’s tough about the company is trying to place a valuation on it. Growth ebbs and flows in the airline business, so you have to be comfortable with the idea that you are buying into a good long-term business.
So, sure, Southwest is a great airline and a great company. But that doesn’t always translate to being a good stock. Sometimes great businesses are never rewarded in the stock market. I often think of timeshare stocks, which never got any love from the markets.
And Southwest’s stock has been all over the place. It just broke out of a long-term uptrend and has leaped from $9 to $14 in the past few months, but there’s no way of knowing if that will continue in the long term.
My problem is that, while Southwest is a great company, I’m not seeing long-term uptrends in the stock. Its all-time high was way back in 2000, and still hasn’t recovered.
So while I like everything about Southwest as a company, I’m afraid its best place in a portfolio is as a swing trading stock.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.