Will Southwest Airlines Soar Higher?

With shares of Southwest Airlines (NYSE:LUV) trading around $13, 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 operates passenger airlines that provide scheduled air transportation services in the United States. Air travel is used by many consumers nationwide for its efficiency and convenience. As technology advances and flights continue to become more accessible, Southwest Airlines is poised to increase profits. As one of the market leaders in the airline industry, Southwest Airlines is well-positioned to provide this service to businesses and consumers nationwide.

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Head on over to the next page to explore the technical landscape of Southwest Airlines’s stock…

T = Technicals on the Stock Chart areMixed

Southwest Airlines stock has been in a long-term decline since hitting highs in late 2000. Currently, the stock is at a critical multi-year downtrend zone that can propel the stock towards higher prices on a breakout. 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 all of its key simple moving averages which signals a strong uptrend in the near-term.

LUV

(Source: Thinkorswim)

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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

21.96

16%

10%

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

April Options

Average

Average

May Options

Average

Average

As of today, there is an average demand from call buyers or sellers and average demand from put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral 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 investors like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-72.73

1000%

30%

92.31%

Revenue Growth (Y-O-Y)

1.53%

-0.05%

10.40%

22.25%

Earnings Reaction

0.79%

0.33%

-2.87%

4.32%

Southwest Airlines has seen increasing earnings and revenue growth minus a couple of negative numbers. From these figures, investors have been generally pleased about Southwest Airlines’s last four earnings announcements.

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P = Average Relative Performance Versus Peers and Sector

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

Southwest Airlines

Delta Air Lines

JetBlue Airways

Spirit Airlines

Sector

Year-to-Date Return

25.79%

35.98%

15.76%

41.79%

23.01%

Southwest Airlines has been a strong performer, year-to-date, but has trailed a couple of the leaders in its sector.

Conclusion

Southwest Airlines operates in a sector that has been hot year-to-date. The stock has benefited from this surge in demand as it attempts to break above key levels on increasing earnings and revenue growth rates. However, relative to its peers and sector, it has not been the best performer. Look for Southwest Airlines to continue to OUTPERFORM.

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