Don’t Expect a U-Shaped Recovery by Southwest Airlines Stock

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Airline stocks are an excellent gauge of the progress of America’s economic recovery from the novel coronavirus. Southwest Airlines (NYSE:LUV) will only prosper if consumers feel that flying is safe and have enough disposable capital to spend on airfare. Thus, the fate of LUV stock holders depends on a myriad of factors, some of which are out of the company’s control.

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It’s sad to say, but the hopes of a V-shaped rebound by the U.S. economy were abandoned long ago. Sure, tech stocks are flying high and, to a large extent, are propping up the stock market. But stocks in some other sectors, including airlines, have struggled.

Is a U-shaped recovery by LUV stock possible at this point? If so, that would mean that Southwest could return to its pre-pandemic levels in the near future. That’s an exciting scenario to consider, but it might not be realistic.

A mix of positive and negative factors paint a complex picture for the airline industry in general and for Southwest in particular. There are reasons to own LUV stock, but it’s only an appropriate investment for the most patient among us.

A Closer Look at LUV Stock

Prior to the onset of the coronavirus, the bulls were eyeing the $60 level for LUV stock’s next leg up. Frustratingly, the stock price didn’t get there before the Covid-19 pandemic started.

After a swift and alarming decline, the LUV stock price bottomed out in May at $22.47. That’s interesting because many other American stocks hit bottom in March. But the airline sector has faced extraordinary challenges in the wake of the global pandemic.

During the first couple of weeks of September, LUV stock threatened to retake the $40 level. There was hard resistance at that level in early June.

A strong push on heavy trading volume will be needed if the bulls are to regain complete control of the price action. So, while it’s much too late for a V-shaped recovery, a U-shaped pattern might be possible.

No “U” for You

However, just because a U-shaped recovery is possible doesn’t mean that it will be easy to achieve. One of my biggest concerns is that LUV stock holders are pinning their hopes on large-scale purchases and distribution of Covid-19 tests by the airlines.

The problem is that these tests won’t immediately solve all of the industry’s problems. Raymond James analyst Savanthi Syth expands on this point, writing, “We still expect the current virtually insatiable demand {for tests} will exceed the new supply with air passengers low on the totem pole of allocations.”

In other words, even if rapid Covid-19 test kits are mass-marketed soon, the first batches probably won’t be distributed to airlines.

Moreover, I would imagine that flyers want a vaccine, not just test kits. It’s hard to imagine a sustainable U-shaped recovery in any airline stock before a vaccine is given to most Americans.

Best of the Bunch

Even with all of that in mind, there’s no reason to lose faith in LUV stock. In actuality, this stock might be the best bet among airline-sector investments.

Citing “increasing revenue efficiency” and a comparatively strong balance sheet, Berenberg analyst Adrian Yanoshik suggests that Southwest could achieve break-even in cash flow sooner than the company’s competitors.

Yanoshik even went so far as to value LUV stock at $45, thereby implying considerable gains versus the current share price. Morgan Stanley analyst Ravi Shanker took it a big step further, assigning LUV stock a rating of “overweight” plus an ambitious price target of $54.

The Bottom Line

It’s great to hear that some analysts think LUV stock can climb meaningfully. Yet I would advise a cautious stance. With a Covid-19 vaccine yet to be discovered and distributed, a U-shaped recovery may still elude airline-sector investments.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.


The post Don’t Expect a U-Shaped Recovery by Southwest Airlines Stock appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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