Southwest Airlines Stock Rips 11% — Now What? 

LUV stock has been hammered, but it's outperforming its peers thanks to better financials

Airlines have been devastated by the coronavirus. Down “just” 34.9% from its one-year highs though, and Southwest Airlines (NYSE:LUV) hasn’t performed all that bad. In fact, LUV stock is outperforming all of its major peers.

Source: Jeramey Lende /

Does that observation, combined with the stock’s recent double-digit rally, make it a buy?

It certainly makes it stand out for additional analysis. While many investors like to bottom fish — likely due to the big rally potentials, as American Airlines (NASDAQ:AAL) jumped more than 35% on Tuesday — relative strength is an attractive quality for stocks too.

Let’s put it this way. American Airlines is still down 53% from the highs, while United Airlines (NASDAQ:UAL) is down 62.3%. Delta Air Lines (NYSE:DAL) is off 55% and Spirit Airlines (NYSE:SAVE), which soared almost 40% Tuesday, is still down 68% from its one-year highs.

Down 35% from its high and Southwest doesn’t look at that bad now, huh?

A Closer Look at Southwest Airlines

Southwest Airlines is one of the healthier airlines out there. Its trailing free cash flow of $2.96 billion lags only Delta.

The crazy thing is, though, Southwest generates significantly less revenue than its competitors. For instance, Delta generated trailing sales of $47 billion vs. Southwest’s sales of just $22.4 billion. American and United both had more than $40 billion in revenue, too.

So the fact Southwest can generate such strong free cash flow on such low revenue compared to its peers is really impressive. It also has the best profit margins of the group.

This is telling, too. Of the five airlines listed above, LUV stock boasts a quick ratio of 1.06. By normal standards, that’s not all that impressive, but for an airline, it’s solid.

Let’s put it this way: The next closest reading comes from Spirit at just 0.57. In other words, Southwest has one of the healthiest balance sheets of the bunch as well.

At the end of the day, Southwest has outperformed the stock performance of its peers, simply because Southwest Airlines has spanked its competition on the financial metrics. That said, the current virus situation is benefiting no one. Airline traffic is taking a serious hit, weighing on the entire industry.

While companies probably should have spent less on buybacks throughout the years, it’s hard to blame them for not expecting a global pandemic to slam on the economic brakes. The hit to free cash flow, revenue, and earnings will be meaningful. And it comes as we near the all-important summer season.

With any luck, the virus will soon peak and the public can get on with their normal lives. If it persists, however, it will likely be a problem for the airline industry.

Trading LUV Stock

Southwest Airlines may have the best metrics and may have held up best relative to its peers. But does that make it a buy? Not necessarily.

When the markets go into free-fall mode, unfortunately technical support levels can go out the window. Same with the fundamentals in many cases. Many investors and traders don’t like to admit that, but it’s true. Don’t get me wrong, both forms of analysis can help make key decisions, but oftentimes we need to understand there are larger forces at play.

In any regard, you’ll notice on the chart above that LUV stock has struggled since breaking support at $48. Each decline has resulted in a series of consolidation zones that ultimately led to lower prices. That’s shown via the blue boxes on the chart.

For the first time, we’re seeing LUV stock resolve higher instead of lower. From here, investors can now start to see a trade develop. For instance, above $34 and Southwest shares can remain in “zone 2.” Below $34 and it enters back into “zone 3” near the lows.

If shares can advance above $42 and enter back into “zone 1,” then even more upside can be realized. However, under the circumstances, I imagine it will be hard for shares to reclaim the $48 mark. For now, let’s see if shares can get up into the $40 to $41 area, and then potentially move higher. Below $36 puts $34 or lower on the table.

For many investors, it may still be too early to enter LUV stock. I don’t blame them. At least until we have more certainty in place or until a trend begins to form on the chart. For the time being, we have levels we can trade against, and that will have to do.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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