<p>Airlines have been destroyed by coronavirus. Down “only” 34.9% from one-year highs, and Southwest Airlines (NYSE: LUV) has not performed so poorly. In fact, the LUV shares surpass all of its big mates.
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Does that observation combined with the stock‘s latest double-digit rally make it a buy?
It really makes it stand out for further analysis. While many investors like to bottom fish – probably because of the large rally potential, as American Airlines (NASDAQ: AAL) jumped more than 35% on Tuesday – relative strength is also an attractive quality for stocks.
Let’s say so. American Airlines is still down 53% from the top, while United Airlines (NASDAQ: UAL) is down 62.3%. Delta Air Lines (NYSE: DAL) is down 55% and Spirit Airlines (NYSE: SAVE), which rose nearly 40% on Tuesday, is still 68% lower than one-year highs.
Down 35% from its high and southwest does not look so bad now, does it?
A closer look at Southwest Airlines
Southwest Airlines is one of the healthier airlines out there. Its subsequent $ 2.96 billion free cash flow only delays Delta.
The crazy thing, though, is that Southwest generates significantly less revenue than its competitors. For example, Delta generated subsequent sales of $ 47 billion compared to Southwest’s sales of just $ 22.4 billion. America and United both had more than $ 40 billion in revenue as well.
So the fact that Southwest can generate such a strong free cash flow on such low revenues compared to its colleagues is really impressive. It also has the group’s best profit margins.
This is also telling. Of the five airlines listed above, the LUV share has a fast ratio of 1.06. By normal standards, it’s not that impressive, but for an airline, it’s solid.
Let’s put it this way: The next closest reading comes from Spirit at just 0.57. In other words, Southwest also has one of the group’s healthiest balance sheets.
At the end of the day, Southwest has outperformed its peers’ stock performance, simply because Southwest Airlines has spanked its competition for financial measures. That said, the current virus situation benefits no one. Air traffic is hit hard and weighs on the entire industry.
Although companies probably should have spent less on repurchases over the years, it’s hard to blame them for not expecting a global pandemic to hit the economic brakes. Here to free cash flow, revenue and revenue will be meaningful. And it comes as we approach the important summer season.
Fortunately, the virus will soon peak and the public can continue their normal lives. If it persists, it will probably be a problem for the aviation industry.
Trade LUV shares
Southwest Airlines may have the best measurements and may have held the best in relation to its peers. But does that make it a purchase? Not necessarily.
Unfortunately, when the markets are in a free fall, technical support levels can go out the window. Same with the basics in many cases. Many investors and traders do not like to admit it, but it is true. Do not get me wrong, both forms of analysis can help make important decisions, but often we need to understand that there are greater forces at play.
In any case, you will notice in the chart above that the LUV stock has struggled since breaking support to $ 48. Each decline has resulted in a series of consolidation zones that ultimately led to lower prices. It is shown via the blue boxes on the chart.
For the first time, we see the LUV share redeem higher instead of lower. From here, investors can now see a trade develop. For example, over $ 34 and Southwest shares may remain in “zone 2.” Under $ 34 and it goes back into “zone 3” near the falls.
If stocks can advance above $ 42 and return to “zone 1”, even more upside can be realized. But under the circumstances, I imagine it will be difficult for stocks to reclaim the $ 48 mark. Let’s see if stocks can go up in the $ 40 to $ 41 range and then possibly go higher. Under $ 36, $ 34 or less is placed on the table.
For many investors, it may still be too early to subscribe for LUV shares. I do not blame them. At least until we have more security in place or until a trend begins to form in the chart. At the moment, we have levels we can trade towards, and we have to do that.
Bret Kenwell is the director and author of Future Blue Chips and can be found on Twitter @BretKenwell. At the time of writing, Bret Kenwell had no position in any of the above securities.