Is Southwest Airlines (NYSE:LUV) stock a good “bottom-fishing” opportunity? That depends. Sure, it’s stronger than its rivals. But that may not be enough.
We may have made progress on overcoming the novel coronavirus pandemic. Yet, air travel could remain in the dog house for quite some time.
As it stands now, investor sentiment towards the airline space remains negative. Even Warren Buffett has sold his airline stocks, including Southwest. On the other hand, we could be seeing a “darkest before the dawn” moment right now.
So should investors buy airlines stocks today, when pessimism towards the sector is elevated, and sell them at significantly higher price when things rebound? Set it and forget it, right? Not so fast!
Bottom fishing with airline stocks is easier said than done. Since it’s a capital-intensive, cyclical industry, it’s easy for investors to lose their shirt with it, even in a mild recession. Today’s “perfect storm” of bad news for the airlines should give investors additional pause.
I’m not saying airline stocks are headed to zero. Far from it. The capital they raised recently should help keep them in the sky. But if you are looking for a stock that could double within a year, you better look elsewhere.
Let’s dive in and see why Southwest remains a sell, even as it trades around its 52-week lows.
Where Things Stand Now for LUV Stock
As you know full well, air travel has dropped tremendously due to the pandemic. And Southwest Airlines is no exception. The airline says its revenue could fall as much as 95% year-over-year this month. As “shelter-in-place” orders expire, we could be reaching a bottom in terms of demand for air travel. Yet it remains to be seen whether the airline’s ticket sales will improve during the summer.
Southwest needs enough capital to ride out the storm. The company has accomplished that goal. Late last month, the airline raised $4 billion by selling stock and convertible debt. That is on top of the $5.2 billion it raised earlier in 2020.
Southwest’s funds should help minimize the risk facing LUV stock. Yet things could get worse as the company continues to burn cash.
Sure, Southwest has managed to reduce its daily cash burn from as much as $65 million per day to about $30 million per day.
By deferring the delivery of new planes and undertaking other cost-saving initiatives, Southwest has done the best it can to minimize its losses. But, since the possibility of a near-term air travel rebound has all but been written off, there’s little reason to jump into the stock right away.
The Risk/Return Ratio Is Not Good Enough to Justify a Buy
Southwest’s recent capital raise and cost-cutting measures may prevent LUV stock from heading lower. But is that a good enough reason to jump into the shares?
Yes and no. At around $26, the stock is down around 56% from where it was back in February. But the potential rebound of the stock back to its prior highs isn’t worth the wait.
It could be years before the shares hit their high-water mark again. Industry leaders like Boeing (NYSE:BA) CEO Dave Calhoun think that air travel will only recover two to three years from now. If Southwest’s stock doubles within that time frame, its owners’ return wouldn’t be bad. But there’s no guarantee that will happen.
In short, those who buy LUV stock are assuming a lot of risk relative to its potential return, so it’s not the best opportunity. Also, who’s to say that the shares have bottomed out at today’s prices? Carriers like United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL) have each seen their shares tumble between 60% and 70% since the outbreak first hit China.
Granted, there are good reasons why the stock prices of the legacy carriers have declined sharply. As I wrote back in January, American Airlines has other operational issues beyond its coronavirus headwinds. And as InvestorPlace columnist Ian Bezek wrote in a May 1 column, United’s two main hubs, Houston and Denver, could continue to see weak demand after the pandemic for a variety of reasons.
Yet even though Southwest is a relative “quality” play in this hard-hit industry, the stock may have to fall before it becomes a screaming buy.
Sell Southwest, as the Rebound Isn’t Worth the Wait
The pandemic’s impact on the U.S. economy may be starting to subside. States are loosening restrictions, allowing businesses and households to start “returning to normal.” But the airlines are far from being out of the woods. Weakened travel demand could linger for the rest of the year.
The shares could double if and when an air travel rebound occurs. In the meantime, however, they could tread water or head lower. With that in mind, sell LUV stock, as its potential gains aren’t worth the wait.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.