Southwest Isn't Getting the Love It Deserves

11/24/2010 9:56 am EST

Focus: STOCKS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer's Investment Research writes that the homespun discount carrier could keep rising if it wins over some of its doubters on Wall Street.

This column from BNET.com argues that while Southwest Airlines (NYSE: LUV)-which will turn 40 next year-appears "folksy, quirky, and old-fashioned" on the surface, the airline "represents the most compelling symbol of cutting-edge business leadership in America today." As evidenced by Apple (Nasdaq: AAPL) and Netflix (Nasdaq: NFLX), "the most successful organizations don't just out-compete their rivals, they redefine the terms of competition by embracing one-of-a-kind ideas in a world filled with me-too thinking," the author writes.

On that note, Southwest has done more than enough to stand out from the crowd-whether it's the firm's unique fleet of only Boeing 737 aircraft or its lack of assigned seats, "Southwest Airlines is more than just a company, it's a cause." Against this backdrop, the columnist opines that Southwest's strategy of fostering creativity should help the company keep its head above the clouds in tough times, as "it's the organizations and leaders that see a different game that wind up winning big."

Stock's Taken Off
Technically speaking, LUV has emerged as a broad-market standout lately, outperforming the Standard & Poor's 500 index by almost 9% during the past 60 sessions and tagging a new multi-year high of $14.32 just last week. From a longer-term perspective, the equity has advanced more than 50% during the past year, and is now testing support at its ten-week moving average. This trend line ushered the shares more than 100% higher from June 2009 until May 2010 and could once again launch LUV on its next leg higher.

However, despite the stock's recent quest for new highs, there's still plenty of pessimism plaguing the airline issue. According to Zacks, half of the 14 analysts following the stock maintain "Hold" or worse opinions. Likewise, Thomson Reuters deems the average 12-month price target on the equity at $15.86, implying expected upside of just 16% to LUV's closing price of $13.64 on Monday.

Option Traders Lean Bearish
Meanwhile, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.10 indicates that puts outnumber their bullishly biased opposites among options with less than three months to expiration. In fact, this ratio rests in the 76th percentile of its annual range, suggesting that short-term speculators have been more skeptically skewed toward LUV just 24% of the time during the past 52 weeks.

Should LUV continue to impress both on and off the charts, a flood of upgrades and/or price-target boosts, or a reversal in sentiment in the options arena, could help the equity extend its northern trajectory.

[While Southwest may be a profitable standout in the US, airlines around the world have been flying high. Jim Jubak's recently written about a South American merger that could create a continent-wide carrier. Ireland's financial straits have only recently begun to weigh on Ryanair (Nasdaq: RYAAY), often described as the Southwest of Europe. Michael Shulman noted some of Ryanair's quirks back in March-Editor.]

Subscribe to The Option Advisor here.

Related Articles on STOCKS