Southwest Stock May Be Worth Some Love

The travel and leisure industry has been ground zero for stock price erosion at the hands of the coronavirus from China. One of the epicenters of disaster has been airline equities, including Southwest Air (NYSE:LUV). But LUV stock may be worth embracing when fears of the virus abate.

When the All-Clear Sounds, LUV Stock Should Be Your First Buy

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Markets rallied on Tuesday, Mar. 24 amid hopes that Congress and the White House are finally nearing an agreement on a stimulus package, $25 billion of which would be allocated to the airline industry. The Senate approved the deal last night.   Those headlines sent Southwest soaring by 11.65% on nearly double the average daily volume yesterday and another 7% today. Underscoring the weakness of airline stocks this month, Southwest is still sporting a loss of 22% this year.

Big one-day rallies are hallmarks of bear markets, and it may be too early to say that airline stocks have capitulated. Further,  it should not be ignored that Southwest yesterday said that it’s canceling 1,500 flights per day starting this Friday due to waning demand. That’s substantially higher than the 1,000 cancellations that it had previously forecast.

For investors looking to bottom fish with airline stocks, Southwest is a good one to consider, due to its better-by-comparison balance sheet, among other factors. Analysts are acknowledging the attractiveness of LUV stock; two analysts upgraded the shares on Mar. 23 to the equivalent of “buy” ratings.

However, the coronavirus situation is fluid, meaning there’s more to the story.

We’ve Been Here Before

Unfortunately, there is a template for how the airline industry weathers these storms: the Sept. 11, 2001 terrorist attacks. A study by professors at the University of Hawaii and UNLV notes, not surprisingly, that in the aftermath of 9/11, demand for plane tickets plunged by staggering percentages.

Southwest CEO Gary Kelley recently made comparisons between the coronavirus situation and 9/11, and those comparisons look accurate. And as was the case back then, the government will be extending lifelines to airlines to assist the industry through a turbulent time. What’s critical this time around is how the government deploys capital among airlines and how  effectively the industry uses the capital.

Southwest is “the highest quality airline in the group with a very conservative balance sheet and low earnings volatility,” said BofA Securities analyst Andrew Didora in a recent note. “As such, we believe it is best positioned to weather the current coronavirus outbreak given its significant liquidity and low net leverage entering the year.”

The Bottom Line on Luv Stock

Airline stocks, including Southwest, are absurdly cheap. Second, there are indications that investors are seeing that value.

The U.S. Global Jets ETF (NYSEARCA:JETS) sports a price-earnings ratio of 3.5 and has taken in $200 million of new cash this month after never reporting monthly inflows of more than $30 million, according to Bloomberg data. Southwest is one of the ETF’s largest holdings.

Southwest and every other airline stock face near-term headwinds, but investors can do worse than Southwest, which is trading at 7.48 times its forward earnings and whose cash on hand is equivalent to almost 20% of its market value.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold any of the aforementioned securities. 

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