For his model portfolio, John Reese, editor of Validea, selects stocks based on the long-standing st...
Southwest Airlines: Buy the Dips
09/22/2017 6:00 am EST
We’ve seen a lot of turbulence in the shares of Southwest Airlines (LUV) over the past few months. But I’m still 100% certain that this will be one of our best investments yet, says Briton Ryle, editor of The Wealth Advisory.
Since hitting a record high price in early-July, LUV has dropped over 18%. It all started in July when the airline presented preliminary second-quarter numbers. It failed to impress analysts and investors, and the stock started to slide.
Then, the entire airline industry took a hit in mid-August when terrorists attacked Barcelona, Spain. Tourism dropped, and even though Southwest doesn’t fly to Europe (yet), its stock fell with the rest of the industry.
The rest of the bad news came in the form of massive hurricanes hitting Texas, the southern U.S. and the Caribbean. You can’t predict where they will hit and how bad the damage will be until it’s happening. But Southwest is still a strong company. And this 18% dip is a great opportunity to get shares at a discounted price.
If you haven't started a position yet, you can get a rock-bottom entry price. If you already have one, you get to bring your average price down and your average dividend yield up.
And you’ll be happy that you added shares during this dip once hurricane season is over. You see, mixed in with all the bad news was some reassuring data.
The company added more destinations in Mexico and California. And it won’t be long before Southwest is announcing flights to Canada and later Europe. This company has the biggest potential for growth in the entire industry. It’s already the biggest discount airline, and it only flies to cities in the U.S., Caribbean, Mexico, and Central America.
Canada, Europe, and Asia are still massive untapped markets. And I wouldn’t be surprised to see Southwest starting to branch out into them in the mid-term future.
And the company has super strong fundamentals. Southwest is trading at a price-to-earnings multiple that’s far too low, considering its growth potential. The stock historically trades around 20.7 P/E, but it’s currently at 16.1. This means that it has a lot of price growth ahead of it if history is any indicator.
Over the past five years, revenue has increased by nearly 20% and earnings are up a whopping 433%! This is a trend that you can expect to continue once the airline shakes off the damage from recent months.
Now, I’m not saying the stock will turn around tomorrow. It will likely trend back up once the storms have passed. But the damage to top tourist spots in the Caribbean and along the Gulf Coast will deter fall and winter travelers.
So, we can expect to see the effects of these storms carry on for a while. But once we get past that, I see clear skies and a long future of steady gains for our shares. So, I’m recommending that you buy the dip on Southwest and buy future dips on it, as well.
Whatever you do, don’t get scared and dump your shares. Remember, we’re long-term investors. And the only way our strategy will pay off big time is if we stick to it. Be patient. Be brave. Be steadfast. Don’t be swayed by short-term swings. You’ll be rewarded in the end.
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