Does Southwest Airlines Belong in Your Portfolio?

With shares of Southwest Airlines (NYSE:LUV) trading around $26, is LUV an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Southwest Airlines is a passenger airline that provides scheduled air transportation in the United States. Consumers and companies across the nation are now looking to travel at an increasing rates, and since air travel is quicker and is becoming less expensive, it is becoming a common transportation method for many. As costs decrease and flights become more efficient, look for business and retail customers to fly at rising rates. Southwest Airlines stands to see soaring profits as consumers and businesses look to travel more than ever.

Southwest Airlines was fined $200,000 Thursday for an October promotion in which it advertised cheap fares that weren’t actually available. It’s the second time in 10 months that the U.S. Department of Transportation has rapped Southwest’s knuckles for violating the agency’s rules on fare advertising. In addition, Southwest must pay $100,000 from a previous fine for the same type of violations. The DOT last July had suspended that penalty upon Southwest’s pledge to correct the violations. In a consent order with Southwest, the DOT said the Dallas-based airline had engaged in “unfair and deceptive practices and unfair methods of competition.”

“DOT’s full-fare advertising rules were put into place to ensure that consumers are not deceived when they search for plane tickets,” Transportation Secretary Anthony Foxx said in the department’s announcement. “Consumers have rights, and DOT will continue to take enforcement action against carriers and ticket agents when our price advertising rules are violated,” Foxx said.

T = Technicals on the Stock Chart Are Strong

Southwest Airlines stock has been exploding to the upside in the past couple of years. The stock is currently trading near all time highs and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Southwest Airlines is trading above its rising key averages which signal neutral to bullish price action in the near-term.

LUV

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Southwest Airlines options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Southwest Airlines options

23.02%

20%

18%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on SOUTHWEST AIRLINES’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for SOUTHWEST AIRLINES look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

175.00%

6.11%

161.54%

-19.85%

Revenue Growth (Y-O-Y)

2.01%

1.45%

5.48%

0.86%

Earnings Reaction

-1.31%

-2.43%

3.72%

-0.14%

Southwest Airlines has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings aboutSouthwest Airlines’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Southwest Airlines stock done relative to its peers, Delta Air Lines (NYSE:DAL), American Airlines (NASDAQ:AAL), JetBlue Airways (NASDAQ:JBLU), and sector?

Southwest Airlines

Delta Air Lines

American Airlines

JetBlue Airways

Sector

Year-to-Date Return

40.82%

45.61%

57.90%

12.88%

7.31%

Southwest Airlines has been an average performer, year-to-date.

Conclusion

Southwest Airlines provides air travel services to consumers and companies across the nation. The company was fined $200,000 Thursday for an October promotion in which it advertised cheap fares that weren’t actually available. The stock has been moving higher in recent years and is currently trading near all time highs. Over the last four quarters, earnings and revenue figures have been increasing. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, Southwest Airlines has been an average year-to-date performer. Look for Southwest Airlines to continue to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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