Southwest Airlines (NYSE:LUV) CEO Gary Kelly is taking a 10% pay cut as a sign of solidarity with rank-and-file employees who are coping with lower revenues due to the coronavirus from China. While it’s a noble gesture, I’m not sure it’s going to help lift LUV stock out of its tailspin.
Down 18.9% year to date (including dividends), long-time shareholders of Southwest are looking at a 5-year annualized total return of 1.2%, which is 620 basis points less than the U.S. markets as a whole, but 490 basis points higher than its airline peers.
Airline stocks of all stripes are getting hammered.
What Airline Stock to Buy?
I recently suggested that investors consider American Airlines (NASDAQ:AAL) along with six other services stocks that were faltering due to the coronavirus. I picked American because its stock has suffered far more in 2020 — AAL is down 48.2% YTD (including dividends), 2.6 times worse than LUV stock — making it a risky, but potentially more lucrative contrarian value play than Southwest in the weeks and months ahead.
However, for those who don’t mind a little risk, but don’t want to expose yourself to the kind of risk that American Airlines represents, Southwest is an intriguing possibility.
I’ve always liked Southwest. The last time I wrote about it in April 2018, I suggested LUV stock was cheaper than investors realized. Trading around $55 at the time, it went sideways for the next 24 months before the coronavirus sent it reeling in mid-February; it’s down almost 25% over the past month.
MarketWatch published an article on March 7, two days before the 2,100-point correction by the Dow Jones, suggesting that investors’ reaction to the coronavirus and airline stocks was totally overblown, referencing comments from Michael Matousek, the head trader for U.S. Global Investors.
Matousek argued that the U.S. carriers have strong balance sheets. Also, no matter the extent of the outbreak, summer is around the corner. Americans are going to take vacations.
“Are people going to stop going on vacation? No. Will businesses stop travel in perpetuity? No,” Matousek said. “It’s oversold based on people’s fears.”
The International Air Transport Association (IATA) estimates that the coronavirus could cost the global airline industry more than $113 billion from canceled or postponed air travel.
Buy JETS Over LUV Stock
While that’s a huge number, I think a smart play over the next year would be to buy the U.S. Global Jets ETF (NYSEARCA:JETS) — as I write this, it crossed hands at $20.45 — and save some dry powder to buy every week it drops more than 2% over the next 6-12 months.
The biggest reason I’d bet on JETS over LUV or even AAL is that it provides you with diversification through its 33 holdings. The holdings include airline stocks, airport owners and even Boeing (NYSE:BA), which is bound to make a comeback once the 737 MAX is back flying and the coronavirus has been eradicated.
And, for those who really like Southwest, it’s currently the exchange-traded fund’s largest holding with a weighting of 14.42%, 41 basis points higher than Delta (NYSE:DAL), the second-largest holding.
JETS charges 0.60%, which compared to an S&P 500 Index ETF, it isn’t cheap. However, if you want to make a bet on the airline industry recovering from the latest hiccup to its profitable growth, JETS is the best way to go about it.
I like LUV. I even like AAL for speculative bets. But you can’t beat JETS if you want to cover your bases while reducing company-specific risk.
As Warren Buffett says, “Be greedy when others are fearful.”
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. As of this writing, he did not hold a position in any of the aforementioned securities.
