Trade of the Day: SouthWest LUV Stock Should Soar Into Year End

Southwest Airlines Co (LUV) — This airline is known for its discounted fares on shorter-haul, point-to-point flights. Following consolidation in the industry, it is the fourth largest airline in the United States.
The company’s conservative financial policies, including low debt, have led to 41 consecutive years of profitability. Southwest has also delivered steady revenue growth, with Capital IQ expecting a 4% increase in 2015 and another 6% in 2016.
Its analysts laud the airline for having the “healthiest balance sheet among the major U.S. airlines.” And they note its new frequent flyer program and a more sophisticated revenue management system should boost profit margins.
Lower fuel costs could benefit earnings, but LUV has an effective hedging program, which has had a long-term favorable impact on earnings along with an active share repurchase program. Capital IQ estimates earnings will increase 67% in 2015 to $3.35 per share. Its analysts have a “strong buy” on LUV stock with a 12-month price target of $55.
Between September 2013 and late January 2015, LUV stock rose from under $15 per share to over $47. Since then, this year has been spent consolidating those gains. As part of that consolidation, LUV stock appears to have formed a deep “V” bottom in early July with a low at about $32.
The recent market sell-off led to a short-term top at the 200-day moving average at just over $40. But a new buy signal from my proprietary indicator, the Collins-Bollinger Reversal (CBR), near $36 is encouraging.
Buy LUV stock at $36 for a trading target of $46 by year end. If successful, this trade would result in a gain of 28% in four months.