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If You Must Buy One Airline Stock, LUV Stock May Be the One

Has Southwest Airlines (NYSE:LUV) hit a bottom? On two occasions in the week leading up to Mar. 17, LUV stock has bounced off a low around $36 per share. The stock has taken a beating in 2020 and is down nearly 30%. However, Southwest is not an outlier. The entire industry is suffering as consumers race to cancel previously booked flights in light of the coronavirus.

If You Must Buy One Airline Stock, LUV Stock May Be the One

Source: Shutterstock

You’d have to be crazy to buy an airline stock right now, right? That may be true, but Warren Buffett once said, “Be greedy when others are fearful.” If you follow that logic, now may be the time to look at what’s next for airline stocks in general, and I would argue for LUV stock in particular.

How Is Southwest Handling the Crisis?

In response to the crisis, Southwest announced they would be cutting flights by 20% between April and June. “As the impact of the COVID-19 pandemic grows, and based on current booking and cancellation trends, we expect revenue trends for the remainder of March and second quarter 2020 to deteriorate further,” the company said in a regulatory filing Monday.

In addition, the company has also taken out a $1 billion loan from JPMorgan Chase (NYSE:JPM). The company is also suspending share repurchases. With the loan, the company has just over $6 billion in unrestricted cash to help it weather the crisis.

The company is also looking at other measures. On the substantive front, the company is offering voluntary leave to some employees. And then there are symbolic measures such as the company’s decision to restrict passengers to water only on longer flights.

And then there is the company’s CEO Gary Kelly’s decision to take a 10% pay cut in solidarity with rank-and-file employees. It’s easy to get cynical about decisions like that, but I’ll give Kelly credit for the gesture.

Too Big to Fail?

During the financial crisis, the words “too big to fail” become part of our national discussion. Right now, “through no fault of their own” is the rationale coming out of Washington. A number of industries, including airline companies, are about to have a bucket full of money dropped on them to help them survive the economic contraction, which may very well lead to a recession fueled by the coronavirus.

On Mar. 16, President Donald Trump said his administration is interested in providing financial assistance to the airlines. “We’re going to back the airlines 100%,” said Trump. “We’ll be backstopping the airlines…”

But what that financial support looks like has yet to be seen. The trade group that represents Southwest among other carriers says the industry needs $58 billion in government aid for financial stability throughout the crisis. To that end, the President says it could be July or August before the virus fully washes through the country.

What’s Next for LUV Stock?

On Mar. 16, the National Institute of Allergy and Infectious Diseases announced the first human trial for the coronavirus vaccine. While this does not mean that there will be an actual vaccine available any time soon, it is an important first step.

But once the travel restrictions lift, will consumers continue to fly? Michael Matousek, head trader for U.S. Global Investors believes that even though consumers are canceling flights at record numbers, they will return to flying. According to Matousek, consumers will continue to vacation, and businesses will not stop traveling forever. “It’s oversold based on people’s fears,” said Matousek.

But when that will be remains a big unknown. LUV stock was trading sideways before the selloff and I imagine barring catastrophic news on the virus it will continue to trade sideways. So, feel free to put LUV stock on your watch list and be ready to buy when the mood of the country changes.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/luv-stock-in-position-for-rebounding/.

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