Fully a year after the coronavirus stock market crash, investors are still hunting for bargain-priced blue chips. Rollouts of Covid-19 vaccines from GlaxoSmithKline (GSK), Moderna (MRNA), Pfizer (PFE), AstraZeneca (AZN) and Germany’s BioNTech (BNTX) are generating confidence among investors that the airline industry is slowly recovering.


Southwest Airlines (LUV), meanwhile, showed choppy action from December to January. But after a breakout attempt in the first week of February, LUV stock has been soaring.

In a nutshell? We’re seeing the best action by this growth stock in quite a while. Will it continue acting as a market leader in 2021?

After the company reported Q1 results on April 28 last year, shares slumped as much as 24% in rapid turnover and hit their lowest levels since April 2014. But since then, shares have now bounced 169% from its mid-May low of 22.47.

LUV stock got smacked with selling in late January this year after reporting weak quarterly results. A net loss of $1.29 a share in Q4 marked the fourth straight money-losing quarter. Fourth-quarter sales plunged 65% to $2.01 billion. On Monday, Southwest confirmed an expansion of a long-term deal to purchase Boeing 737 MAX passenger jets.

LUV Stock: Still Flying Higher Since April

So at this point, is LUV stock, hitting new 52-week highs and trading 9% off its all-time high of 66.98, a buy now?

And can Southwest, now in its 50th year of service, navigate through the world’s most turbulent health crisis in generations to grow again?

Let’s take a value investing angle and a growth investing perspective. Plus, institutional ownership, a critical ingredient in the CAN SLIM seven-point investment system, will get graded.

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Southwest Airlines: Treat Employees, Customers With ‘LUV’

The company got off the ground after winning a protracted legal battle with Texas International and Continental Airlines. It began service with $20 one-way fares from its home base of Dallas to both Houston and San Antonio on June 18, 1971.

By the end of September that year, Southwest received its fourth aircraft. Then in November, the company “closed the triangle” by launching flights between Houston and San Antonio.

Amid humble origins, Southwest touted itself as the “love airline.” Founder and longtime CEO Herb Kelleher led a culture of treating employees with love, like they’re family members. They, in turn, will treat customers with great service, Kelleher argued. He died while still serving as chairman emeritus in January 2019.

Before Covid-19 hobbled the air transport market, Southwest served 130 million passengers annually and operated more than 4,000 weekday departures through its network of 102 U.S. destinations and 10 countries.

LUV stock debuted on the NYSE on June 8, 1971; it priced 650,000 shares at 11 a share. That gave the young firm $6.5 million in gross proceeds.

Today, LUV stock holds a market value of $36 billion, 590.7 million diluted shares outstanding and a float (a term meaning freely traded shares on a stock exchange) of 584.8 million. That tops a 4,300-fold increase in shareholder value, even after last year’s coronavirus devastation.

The Worst Year For The Airline Business In Decades

In April 2020, coronavirus forced Southwest Air to cancel 1,500 of almost 4,000 flights per day. The NYSE-listed firm agreed to get $3.2 billion in financial aid, including almost $1 billion as an unsecured loan, from the federal government’s CARES Act. In a video, CEO and Chairman Gary Kelly said $2.3 billion would support staff payrolls. In return, Southwest must offer 2.6 million warrants (rights to buy shares at a sharp discount) to the government for up to five years. It agreed to limits on executive pay through March 2022.

The deal also bars LUV stock from issuing common dividends or share buybacks through September 2021.

Liquidity is of paramount importance for airlines. On June 3, Southwest priced a $500 million in senior debt offering with a 4.75% coupon due 2023 as well as $1.3 billion worth of 5.125% notes due in 2027. These debt sales supplement a May 4 issuance of $750 million in 4.75% bonds set to mature in 2023.

Southwest Stock: Great Value Investment?

LUV stock has not seen this kind of correction since it dropped from 14.32 to 7.15 over a yearlong slide ended in October 2011. (Please go to MarketSmith to see a historical chart of LUV stock, all the way back to its 1971 IPO.)

With the benefit of hindsight, at that low of 7.15, Southwest stock traded at nearly 13 times the 56 cents a share earned in 2012. In 2013, LUV doubled profit to $1.12 a share. In short, the stock at one point had traded as little as six times its 12-month-forward earnings.

Top value fund managers tend to scoop up sturdy companies with price-to-earnings ratios that fall to a fraction of what the S&P 500 is priced. The problem with using P-E valuation analysis? Analysts currently think Southwest won’t earn any money in 2021. Rather, the company might lose $1.93 a share this year. Southwest lost $6.22 a share in 2020. Early in 2020, the Street had expected a net profit of more than $3 a share for 2021. Now, analysts polled by FactSet see the company returning to the black in 2022, earning $2.82 a share.

Value investors can make the mistake of grabbing shares in a company with weakening financials. High debt, shrinking cash flow and declining sales can force a stock to hit lower lows. If a company files for bankruptcy protection, the stock can fall to zero.

On March 25, 2020, Southwest paid a quarterly dividend of 18 cents per common share to shareholders of record on March 4. That marked the company’s 174th consecutive cash payout to holders. This gives LUV stock an annual yield of 1.4%. No new dividends were declared in 2020.

LUV Stock Fundamentals: The Growth Investing Perspective

IBD research into the biggest stock market winners finds they tend to show a solid string of quarterly gains in earnings and sales for at least a few quarters before they break out and go into big price runs. The only exception? Turnarounds.

But even for a growth investor, one would prefer to see at least one quarter of year-over-year increases in profits and sales before putting cash to work. This meets the C in CAN SLIM, or a minimum 25% increase in current quarterly earnings per shares vs. a year ago.

Big stock winners also typically show a 25% increase in annual profits over the past few years (the A in CAN SLIM) before they break out to new highs. Looking at top stocks ranking in the IBD 50IBD Big Cap 20 and IBD Sector Leaders, the latest EPS increase can well exceed 25%.

The last time Southwest posted year-over-year profit growth of 25% or more? A 52% jump in the fourth quarter of 2018.

LUV Stock Chart Analysis

Since the IBD current outlook for stocks darkened fast from “uptrend under pressure” on Feb. 24 last year to “market in correction” in the Feb. 25 Big Picture column, LUV stock has suffered a terrible drop. On Feb. 24, 2020, the stock gapped down and fell 4.3%. It also tripped below the 50-day moving average in heavy volume. That triggered a key sell rule. The next day, LUV stock got bombarded by institutional selling. LUV sank 8.2% to 49.66; turnover accelerated. By day’s end, volume jumped 119% above its 50-day average of 4.3 million shares.

In a nutshell, large fund managers were storming the exits. But Southwest Airlines stock bottomed, then completed a cup with handle.

In a good cup with handle, find the proper buy point by adding 10 cents to the highest price within that handle. In a strong breakout, LUV stock should glide past that buy point and keep running. A 40% minimum jump in volume vs. the 50-day moving average indicates that mutual funds, hedge funds, banks, pensions, insurers and the like are hopping aboard. They’re anxiously grabbing shares and building a large position over time.

The top of this handle, 49.53, plus 10 cents, offered a 49.63 buy point.

Relative Strength Analysis

The relative strength line started plunging in late February but has now marked the highest levels in more than a year. The RS line, drawn in blue in all IBD stock charts, tracks a stock’s daily price performance vs. the S&P 500.

A rising RS line means a stock is beating the key large-cap benchmark, even during market declines. Stock market leaders show a rising RS line at the start of a big rally. And some even show an RS line hitting new high ground even before the stock itself makes a powerful breakout.

According to IBD Stock Checkup, Southwest’s IBD Composite Rating has improved to a 53 on a scale of 1 (horrid) to 99 (heavenly). The Composite Rating assesses fundamental, technical and fund ownership factors. In a new bull market, stocks with a 90 Composite or higher tend to lead the run. But turnaround plays tend to show a lower figure at the start of their comeback runs.

The Accumulation/Distribution Rating is now positive at B+ on a scale of A to E. A C grade indicates that buying and selling among fund managers is neutral over the past 13 weeks. An E grade means that institutional investors have been net sellers.

Southwest’s 79 Relative Strength Rating has jumped nicely from 29 six months ago. The biggest stock market winners tend show an RS Rating of 80 or higher before they break out to 52-week highs. But among companies that have built longer bases and moved sideways or lower over a period of 12 months or more, it’s common for turnaround stocks to break out while the RS Rating is in the 50s or 60s.

Is LUV Stock A Buy Now?

One could also view the recent action as a separate pattern by itself: a flat base, or even a shallow double bottom. LUV stock is now extended. From a 49.63 entry, the 5% buy zone goes up to 52.11. So in this case, LUV is not a buy. Those who bought at the proper buy point of 49.63 can now decide to take at least partial profits since the gain has now reached 20% to 25%.

However, the stock has now etched a 3-weeks-tight pattern that offers a follow-on entry point of 62.86.

If the stock powers past that price, it would be a buy.

The 3 weeks tight suggests an unwillingness among shareholders to sell shares. Adding a small amount of shares to a winning position makes sense in this scenario. You don’t want to load up too heavily and send your average cost per share soaring.

Please follow Chung on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, buy points, sell rules, chart analysis and market insight.


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