The airline group has started to catch investors’ attention. They are looking for the next group that could go on a big run. That puts stocks like Southwest Airlines (NYSE:LUV) on the radar, as investors wonder whether LUV stock can keep its place among the best performing in the group.
However, if there’s an upside pop, Southwest may not perform as well as some of its peers. Check this out.
LUV stock is down 36% so far for 2020. That may not be as bad as some investors were thinking. In any regard, the next best performer is Delta Air Lines (NYSE:DAL), which is down almost 53%.
That’s a huge gap between LUV and the No. 2 performer. Delta is followed closely by American Airlines (NASDAQ:AAL), which is down 56.4%, then Spirit Airlines (NYSE:SAVE) and United Airlines (NASDAQ:UAL) are down 57.3% and 61.3%, respectively.
So why wouldn’t LUV stock outperform on the way up? Simply because it has held up better on the way down. In other words, the AAL and UAL’s of the world have more upside potential should the airline space come back in favor with investors.
That’s not to say these businesses are better investments, only that in the short- to intermediate-term, the stocks could have more upside in a momentum situation. Let’s look more closely at Southwest Airlines.
Breaking Down Southwest Stock
Of the group above, Southwest Airlines is among three airlines that are currently forecast to be profitable next year. It joins Spirit Airlines and Delta in that category.
Further, we all know that 2020 is a rough year for the airlines. As a result, revenue is plunging versus 2019 results. However, Southwest and Spirit are the only two that are forecast to recoup more than 75% of 2019 revenue in 2021. United, Delta and American are expected to recover about 65% of 2019 sales.
Like its peers, Southwest Airlines has seen a solid recovery in revenue and bookings from the April lows. However, that demand has plateaued since July. That is clear by the TSA checkpoint travel numbers seen above, as well.
However, unlike many of its peers, Southwest holds a dominant position when it comes to the balance sheet. In its most recent earnings report, management had this to say:
“We have strong liquidity, with cash and short-term investments of $14.5 billion as of June 30, 2020; the only investment-grade credit rating in the U.S. airline industry by all three agencies.”
If I am looking at an investment in the airline space, I want to go with the company that is forecast to be profitable next year and recoup a bulk of its prior revenue. I want the company with the strongest financials and to be in the name that’s holding up the best on the downside.
That said, a robust rally will likely propel its peers higher in the short term. If that’s the case, they may be better trades than LUV stock, but I wouldn’t call them better investments.
Trading LUV Stock
LUV stock isn’t exactly in breakdown mode, but it’s not really thriving at the moment either.
Shares are hugging the 20-day and 50-day moving averages, but are holding up over prior downtrend resistance (blue line). If this support area caves, bulls need to see the $31 support level hold.
Below puts the August and July low in play near $30.25. If LUV stock closes below that, it opens the door to more downside selling pressure.
On the upside, investors want to see a rotation back over the August high, up at $37.44. Above that mark puts the 200-day moving average in play, along with the June high at $42.35.