I will start with the conclusion, then work backwards into it. Investors can own Southwest (NYSE:LUV) stock for the long haul recovery. Shorter term, I would prefer to buy it on the dip towards $40. Last week’s Pfizer (NYSE:PFE) headline spike placed resistance above, so it will be a slog for a few weeks. Case in point, today’s morning rally off Moderna’s (NASDAQ:MRNA) news is much smaller and still 5% points short.
This virus vaccine news directly impacts airline stocks. Southwest has so far withstood the pandemic crisis well. It’s natural that LUV stock spiked 13% on the 9th and again today. The bad news is that it gave most of it up a week ago so it’s a risk again here. Regardless of short-term stock action, this suggests that the worst is over for the cohort, especially Southwest Airlines.
To set the stage for today’s note I assure you that I am not a perma-bull on the sector. In fact, I’ve written on several occasions raising caution. It’s mostly when investors love them (pun intended) too much. In the end, a healthy stock chart should look reasonable. A 13% spike in minutes on no intrinsic news should fade. But from extremes we can then formulate the course of action.
If I had to pick an airline stock to own, LUV stock is it. It built its company on a no-frills mantra, so it was easy for it to hunker down during the novel coronavirus pandemic. Yes, it is still ongoing because according to the TSA daily screenings air traffic is still down 60% to last year.
It will take a long while to build the travel industry back up, but all the signs are encouraging. The trend is improving, but Thanksgiving will be a true test. My family will be among the traveling statistics as we plan on visiting family in Texas. Meanwhile, Southwest management is doing a great job streamlining their resources. The first thing they did was shore up their cash position to survive the shut down. The downside is having more debt but better this than dying lean. All they need is a stream of income so that they can service this debt and stave the cash bleed. The expert reports that it’s getting better and only time will tell.
on May 29, I suggested getting long it and that trade yielded 30% of immediate upside. The opportunity came when Wall Street sold it on American Airlines’ (NYSE:AAL) earnings report. Then in late August I suggested caution and to trade the range. I noted the possibility of a dip to $32 per share, but to chase the breakout. The stock closed still 15% above my breakout lines on Friday so the bulls are definitely still in charge.
Trade LUV Stock With Confidence
Now what? If the investors intend to hold LUV stock for a complete recovery to normal, then they should own it. I expect this will take about a year assuming no virus setbacks. Fundamentally, it is amazing to see it trade this well. Its revenues are 35% of what they were last year. Yet it is still able to operate this well. I’ve flown a few times during this pandemic and I can attest to the industry’s achievement. There were no signs of panic anywhere, just calm and orderly systems in place. Even when they canceled a few of our flights this summer, they had replacement options ready. Efficiency has always been a challenge to the industry … maybe they finally get it now. As they say that life gives us the test and then the lesson.
Until their operations and financials normalize, there are great trading opportunities around the headlines and their aftermaths. Active traders can buy it above $50 to chase the breakout. Conversely, dips into last week’s base or lower are definitely buying opportunities. If for any reason it falls to $36, it would make for a great buying opportunity for investors and traders alike.
LUV stock may have an added benefit from whenever the shackles finally come off Boeing (NYSE:BA) as it releases the 737. Their entire fleet depends on that line of planes. Investors may give it extra “LUV” on that headline.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
