As the Airline Sector Rebound Cools, Hold off on Southwest Stock

In my last write-up on Southwest Airlines (NYSE:LUV) stock, I discussed how shares may have gone up too much, too soon. And, with shares cooling from their recent epic rally, Wall Street seems to agree. Earlier this month, breadcrumbs of positive news sent hard-hit airline stocks significantly higher.

As the Airline Sector Rebound Cools, Hold off on LUV Stock

Source: Carlos E. Santa Maria /

But, the sector may not be out of the woods just yet when it comes to the novel coronavirus.

Fears of a “second wave” have started to make headlines. Besides this being a sign that the global health crisis is far from over, it also means an airline recovery may not be as swift as speculators have anticipated as of late.

Firstly, passenger travel may still continue to be depressed. Secondly, we may be seeing a “new normal” regarding business travel. Instead of in-person meetings and conferences, things may shift more towards virtual platforms like Zoom (NASDAQ:ZM).

In short, quite a bit of short-term and long-term headwinds for the industry. What does that mean for LUV stock? The low-cost carrier has many advantages over its legacy rivals like American Airlines (NASDAQ:AAL), Delta Airlines (NYSE:DAL), and United Airlines (NASDAQ:UAL).

Even so, that doesn’t mean shares are going to retrace past highs anytime soon. It also means the company may have less downside risk compared to other major names. With this in mind, shares may not be a buy today, but if shares continue to pull back, or retest prior lows, they could a strong opportunity.

 LUV Stock Is a More Solid Recovery Play

I continue to believe things are up in the air for the airline sector as-a-whole, but that doesn’t mean all airline stocks should be avoided. The pandemic and its economic impact may push debt-saddled legacy carriers towards Chapter 11. Yet, shares in low-cost carriers like LUV stock stand a greater chance of riding today’s troubles out, eventually retracing past highs.

How so? For one, as InvestorPlace’s Dana Blakenhorn put it Jun 10, Southwest entered the pandemic the “strongest of the airlines.” Today’s challenges may strengthen its edge against its rivals; that includes increasing flights as rivals downsize their operations. Also, they could win out in a fare war the company itself started, further fueling growth during a recovery.

The Wall Street analyst community agrees with this positive outlook. Credit Suisses’ Jose Caiado recently upgraded shares. His rationale? Raising his price target from $35 per share to $45 per share, the analyst cites Southwest isn’t just “a good way to invest in the near-term recovery in leisure travel demand.” But also, he believes the airline’s “best-in-class” balance sheet positions them well to stage an “aggressive comeback.”

Sounds like the perfect recipe for a turnaround play, right? Well, yes and no. These strong fundamentals bolster the bull case for LUV stock. Yet, with shares still much higher than where they were a few weeks back, today’s share price may not reflect the still-existing risks behind this stock.

Still, Near-Term Headwinds Remain

Many signs point to Southwest stock as the best way to bet on an airline comeback, but investors should consider the risks at hand before entering a position. A full airline sector recovery may still be years away.

As I discussed in a recent article on Delta stock, it may take up to five years before we see a “return to normal” scenario. As I mentioned above, we still need to see how quickly leisure travelers return to the skies. More importantly, whether business travel isn’t permanently affected by the pandemic.

We probably won’t see an “end to business travel,” but, as video conferencing has become a viable substitute for live meetings and conferences, expect a pivot to Zoom and other platforms to accelerate.

Weighing these risks against potential upside in the LUV stock price, it may be too soon to enter a position today. Shares have dipped a bit since nearly doubling off their lows earlier this month. Yet, it may pay to wait for shares to dip below the $30 price level before considering shares a worthwhile buy.

Wait for the Dip Lower Before Buying Southwest Stock

The airline sector’s near-term prospects remain cloudy. Yet, this low-cost carrier has greater odds of survival than its legacy peers. However, as speculation fueled an epic rally in airline stocks earlier this month, Southwest stock went up too fast, too soon.

As investors reassess the near and long-term forecast, shares could slowly move down to a more compelling entry point. In other words, shares aren’t not a buy at today’s prices (between $30 and $35 per share).

But, at lower prices ($20 to $25 per share), LUV stock is a worthwhile bet on an air travel comeback.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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