NEW BULLISH Plays
Southwest Airlines Co. - LUV - close: 45.35 change: +0.66
Stop Loss: 41.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on February -- at $---.--
Listed on February 23, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 9.2 million
New Positions: Yes, see below
Why We Like It:
After years of elevated oil prices in the $80 to $110 a barrel range the airline industry was forced to turn into lean, mean machines. When crude oil prices plunged, almost in half, it was a windfall for the airline business. One firm that outperformed them all was LUV. Shares of LUV were the best performing stock in the S&P 500 last year with a gain of +125%. That rally continues today.
The company describes itself as "In its 44th year of service, Dallas-based Southwest Airlines (LUV) continues to differentiate itself from other air carriers with exemplary Customer Service delivered by more than 46,000 Employees to more than 100 million Customers annually. Southwest operates more than 3,400 flights a day, serving 93 destinations across the United States and five additional countries."
2014 was one for the record books for LUV. The company turned in quarter after quarter of record-breaking numbers. They just completed their 42nd consecutive year of profitability, which is quite a feat for an airline. Plus they're on track to pay their 154th consecutive dividend in March 2015.
LUV has been beating Wall Street's earnings estimates for multiple quarters in a row. They often beat the revenue estimate as well. Their most recent report was January 22nd. LUV's 2014 Q4 earnings soared +78% to $0.59 a share. Revenues were up +4.5% to $4.63 billion. Their load factor, an airline metric, hit a record 82.0 percent.
LUV's management commented on the impact of crude oil's decline and how it affects their business:
"With the collapse in fuel prices since September 2014, fuel prices have declined nearly 50 percent. Based on our existing fuel derivative contracts and market prices as of January 16, 2015, we estimate our first quarter 2015 economic fuel costs to be approximately $1.90 per gallon, which would result in approximately half a billion dollars in year-over-year fuel cost savings for first quarter alone."
LUV's CFO, Tammy Romo, went on to say that 2015 could see fuel savings up to $1.7 billion.
Meanwhile airline travel in general is rising. The International Air Transport Association (IATA) said global passenger traffic for 2014 rose +5.9%, which was above the 10-year average and above the last two years in a row.
Since LUV's earnings report in late January there have been multiple analysts raising their price targets into the $55-$60-$65 range.
Oil production in the U.S. has driven oil inventories to 80-year highs and the country could actually run out of storage. This will likely push oil prices even lower. That would mean even more savings for the airlines.
Technically shares of LUV are bullish with a trend of higher lows and higher highs. Traders just bought the dip (twice) near short-term support at $42.00 and its rising 50-dma. The stock displayed relative strength today with a +1.47% gain and look poised to take off again. Tonight we are suggesting a trigger to open bullish positions at $45.50.
Trigger @ $45.50
- Suggested Positions -
Buy LUV stock @ (trigger)
- (or for more adventurous traders, try this option) -
Buy the JUN $50 CALL (LUV150619C50) current ask $1.70
Option Format: symbol-year-month-day-call-strike