When an investment opportunity presents itself, do you take action? Or are you one of the people who sit back and question things over and over again? If you are in the second group, by the time you finished going back and forth on this question, chances are you will miss the buying opportunity that Southwest Airlines has presented to investors.
In this post, I am going to walk you through why Southwest stock has dropped and why hands down this is the best airline stock for you to own. Hopefully by the end, you will be able to take action if the stock meets your portfolio needs.
Why Southwest Tanked
Southwest Airlines (NYSE: LUV) dropped when the company reported earnings that did not impress Wall Street. Specifically, investors fear that the company will be unable to hit profit margin estimates going forward.
The result was a stock that came close to hitting its 52-week low. But was this drop an overreaction by the market?
I think it was.
The current earnings report was solid, as usually is for this airline. Revenues were up over 5%, beating estimates, and earnings per share also beat estimates, coming in at $1.08.
Also, revenue per available seat mile, a key metric in the airline industry came in weaker than expected. However when you dig deeper into this, you will see that the main culprit of this were the hurricanes that hit the eastern coast of the United States.
This led to many flight cancellations, dragging down the companies numbers.
Overall, the company has a lot going for it. Here are the highlights:
- Smart management team. Southwest has historically made well-thought out, calculated decisions to help grow the company.
- Strong balance sheet. The company only has $3 billion in long term debt and no major plans or needs to add or replace any airlines.
- Operational efficiency. They are able to fly more routes and be on time than any other major airline.
I want to touch on this last point a little more because it is so important. Unlike with other airlines which have hubs around the country that they use as layover spots, Southwest avoids this design flaw.
They instead fly shorter routes with non-stop flights. This drastically limits late arrivals and delayed take offs. In addition to this, while other airlines have a fleet of many different types of airlines, Southwest only flies the 737.
This is important to operational efficiency too. The company can more quickly repair and maintain their fleet simply because every airline is the same. This helps to keep the planes in service, allowing the company to fly more routes. It also helps to keep costs in check.
Why I Think The Selloff Is Overblown
We are in an interesting time in this bull market run. It is the longest in history and while there is always chatter in the background about the end being near, I feel more and more investors are now purposefully looking for signs.
The result is they take any negative they can find and blow it out of proportion. This is what happened here.
The truth is Southwest Airlines is by far the best airline stock you can own. They have proven time and time again they make the right decisions and smart decisions at that. The model they use is incredible.
And overall, they deliver on what they say they will. In the rare cases they don’t, they regroup and make it happen the next time around.
The result in all of this is an overreaction by the market. And any bad news coming forward from any stock or even the economy is going to affect the market. We are living in a world of volatility again.
The result is you need to be a smarter investor than ever and really dig into what is going on with stocks you are interested in.
With the case of Southwest, you will see that this is a great buying opportunity. Yes, over the short term there might be some turbulence, but nothing to justify the pullback the stock experienced.
At the end of the day, Southwest is the best airline you can own. Not only that, this stock is a great one to own, regardless of the industry you are looking at.
Rarely do you find a company with such a smart and powerful management team that knows how to keep costs low and deliver time and again to shareholders.
If this stock had been on your radar, now is the time to stock up on shares while you can.
This author does not have any shares in the companies named in this post and does not plan to own any within 72 hours of this post.