Southwest Airlines: Too Much Love for LUV?

Airline stocks have been the beneficiary of falling oil prices and as a result have seen their prices ramped up dramatically over the six months. While oil has fallen by more than 50%, the average airline stock has risen by approximately 35% in the last six months. Southwest Airlines (NYSE: LUV) has jumped 43.38% in the last six months alone and it has tripled in price in the last 18 months.
The weekly chart shows how much the stock has risen in the last year and a half, but it also shows how the stock has been in overbought territory almost that whole time. The stock has pulled back slightly and is sitting right at its 13-week moving average. The stock has only closed below the moving average two weeks during this tremendous bull run.
With fuel costs being one of the largest expenses for the airline, it is understandable that investors would dive into the stocks with the freefall oil has experienced. However, I have to wonder if the stocks haven’t jumped too much.
The daily chart shows how the recent pullback has caused the stock to reach oversold levels based on the slow stochastic readings and the stock is testing the low from the December pullback.
Southwest Airlines is scheduled to report earnings next Thursday (Jan. 22) and the sentiment toward the stock is extremely bullish heading in to the announcement. In the last 90 days, analysts have ratcheted up their earnings estimates to the point that the consensus has jumped from $0.48 per share to $0.55 per share.
The sentiment indicators are showing a huge bull skew as well. The short interest ratio on the stock is a paltry 1.5, the put/call ratio is lower than 78% of the readings for the past year and out of 19 analyst ratings, 13 are “buy” ratings and only one is a “sell.”
Personally I wouldn’t be a buyer of Southwest Airlines or any other airline at this time. The huge price run-up shows that the drop in fuel prices has already been priced in and the earnings adjustments reflect how high the hurdle has been raised. Even if the company meets or exceeds the earnings estimates, how many investors are still waiting to buy the stock?
The second reason I don’t like airline stocks right now is the fact that the bullish run is almost all based on the drop in oil. If oil starts rising, what is going to happen to the price of Southwest and the other airlines? That’s right, LUV and the other airlines will likely drop if oil starts climbing again. Oil is the most oversold it has been in over 20 years and there is support at the $40-a-barrel level. It seems likely that oil prices will start rising sooner rather than later.
My suggestion is to stay away from Southwest Airlines. If you own the stock, I would buy some protective puts ahead of the earnings report.

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