Does Southwest Airlines Belong in Your Portfolio?

With shares of Southwest Airlines (NYSE:LUV) trading around $21, 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 is expanding beyond the continental United States with flights to the Caribbean beginning July 1. The airline began selling tickets on Monday for flights to Aruba, the Bahamas, and Jamaica from Atlanta, Baltimore, and Orlando. Those routes are currently flown by AirTran Airways, which Southwest bought in 2011. Southwest carries more passengers in the United States than any airline, but among the largest U.S. carriers, it alone doesn’t fly beyond the nation’s borders. Southwest has been talking about going international for years, but it’s been held back by technological limits to its reservations system, which it has been upgrading.

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 highs for the year and looks set 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 signals neutral to bullish price action in the near-term.

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	28.41%	83%	81%

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

	Put IV Skew	Call IV Skew
February Options	Flat	Average
March Options	Flat	Average

As of Tuesday, there is 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 very significant 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 Mixed 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?

	2013 Q4	2013 Q3	2013 Q2	2013 Q1
Earnings Growth (Y-O-Y)	6.11%	161.54%	-19.85%	-17.97%
Revenue Growth (Y-O-Y)	1.45%	5.48%	0.86%	11.27%
Earnings Reaction	-1.88%	3.71%	-0.14%	0%

Southwest Airlines has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Southwest 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), and JetBlue Airways (NASDAQ:JBLU) — and sector?

	Southwest Airlines	Delta Air Lines	American Airlines	JetBlue Airways	Sector
Year-to-Date Return	12.42%	13%	24.55%	1.41%	13.84%

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

Conclusion

Southwest Airlines provides air travel services to consumers and companies across the nation. The company is expanding beyond the continental United States with flights to the Caribbean beginning July 1. The stock has been moving higher in recent years and is now trading near highs. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has left investors pleased with 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.