Investing in airlines isn’t for the faint of heart at the best of times, but in 2020 it takes nerves of steel. Airlines were hammered by the novel coronavirus pandemic. That resulted in record lows for airline stocks, but any opportunity has to be weighed against the prospect of a lengthy recovery. Or the very real possibility of bankruptcy. Southwest Airlines (NYSE:LUV) stock is a good example.
In a three-month period starting in mid-February, the stock plummeted by 59%. Since then, it has crawled its way out of those May lows, but has effectively been stalled through the summer.
Morgan Stanley analyst Ravi Shanker is feeling bullish about airlines, and Southwest in particular. Earlier this week, he predicted that airline stocks would rally 30% over the next year. He made LUV stock his top pick, assigning it an overweight rating based on Southwest’s focus on low cost, domestic leisure flights.
The problem I see is that an awful lot has to go right in a relatively short period of time for Southwest — or any airline for that matter — to bounce back so quickly. There are much safer bets out there, for example the stocks I identify with Growth Investor.
Air Travel Remains Iffy
In order to stop bleeding cash, airlines need to fly passengers. Southwest Airlines reported its 47th straight year of profitability in January, but by May it said it was expecting to burn through at least $30 million a day in cash as its planes sat empty. By July that had been reduced to $16 million per day, but in the second quarter Southwest still reported a net loss of $915 million.
Many international flights remain grounded, with passengers from the U.S. subject to a travel ban. Domestic air travel had been on the rise, but coronavirus outbreaks through July resulted in that stalling. At this point, some states require out-of-state visitors to quarantine or show proof of a negative Covid-19 test. The CDC is still warning Americans that travel “increases your chances of getting and spreading Covid-19.”
None of this bodes well for a recovery in the airline industry any time soon. Fortunately there are plenty of other spaces and themes that are still ripe for growth opportunities. Take my “AI Master Key” for example — it’s a stock that’s bound to lead machine learning initiatives in numerous industries.
Counting On a Vaccine for Recovery
The one thing that everyone is counting on to put this pandemic nightmare to an end is a Covid-19 vaccine. That’s why so many biotech and pharmaceutical stocks have performed spectacularly in 2020. An effective vaccine is the key to a return to normalcy, and no one is watching developments on this front more closely than airline executives.
However, a vaccine is far from a slam dunk. One of the most promising vaccine candidates has just seen phase three human trials halted due to a potential adverse reaction among one of its participants. The World Health Organization calls this development a “wake-up call” that an approved vaccine isn’t necessarily something that can be rushed.
Assuming a vaccine is developed, it will take more time to manufacture and distribute doses. From there, it will take more time before people regain confidence in the safety of travel.
Will all of this happen in the next year? It’s hard to picture LUV stock rallying 30% unless it does.
A History Lesson From The Great Recession
It’s far from an exact match for the current circumstances, but the great recession (2007-2009) offers some lessons for those expecting an airline stock rally.
Consumers tightened their spending — especially on discretionary expenditures like travel — and the airline industry felt the impact. A Wharton paper called the drop in airline passengers during the time “unprecedented.” So was the drop in airline revenue. LUV stock dropped by over 60% between 2008 and 2009, and it took five years to recover to 2008 levels.
Bottom Line on LUV Stock
Southwest Airlines may be in better shape than many of its peers. It was confident enough to turn down a $2.8 billion CARES Act loan in August. However, it’s still losing money and with no end in sight to the pandemic, LUV stock rates an ‘F’ in Portfolio Grader. Survival is one thing, but for Southwest shares to achieve that 30% rally over the next year, the airline is going to have to do a lot more than just survive. And at this point, I just don’t see a clear path to that happening.
If you’re looking for growth and/or reliability, I’d look at different themes and industries than airliners right now.
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On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
