Airline stocks have bounced recently as promising COVID-19 vaccine headlines spurred optimism around a return to traveling.
American Airlines (NASDAQ: AAL) and Southwest (NYSE: LUV) are up nearly 9% over the last week. Delta (NYSE: DAL) and JetBlue (NASDAQ: JBLU) are both up more than 10%. And United Airlines (NASDAQ: UAL) is up 11% in the last week.
But even with all these stocks on the rise, one stock in the group looks like the best bet in the fleet.
Jefferies initiated coverage on Southwest this week with analyst Sheila Kahyaoglu issuing a Buy rating on the stock and a $55 price target – 19% higher than the price as of this writing.
Kahyaoglu argues Southwest’s almost entirely domestic focus, with more than 95% of its sales from domestic flights, is a benefit as domestic leisure travel is leading the recovery in air travel and is expected to account for most industry revenue in 2021 as business and international flights take longer to rebound.
The Jefferies analyst also likes the airline’s strong liquidity and low leverage ratios, which she says should position Southwest to outperform and take market share as we emerge from the coronavirus pandemic.
Kahyaoglu isn’t the only analyst bullish on Southwest. Cowen’s Helane Becker reiterated an Outperform rating on the stock last weekend.
“The company’s brand, product and operation are held in high regard and will be a focus during the recovery,” Becker wrote.
Todd Gordon, founder of TradingAnalysis.com, also sees opportunity in Southwest shares.
“I would be cautiously looking to add Southwest to the portfolio,” Gordon said this week. “Going into [the pandemic], they were better equipped – they had less debt, lower expenses, and they were focused on domestic travel.”
What’s more, Gordon argues Southwest’s chart points to significant upside ahead.
Looking at the chart, Gordon says shares could break above $55 and then possibly break out above $70 once a COVID-19 vaccine becomes widely available. From Thursday’s closing price of $46.08, a move to $70 would be a gain of nearly 52%.
Strategic Wealth Partners president Mark Tepper is also positive on Southwest, and says it is one of the best-positioned airlines as the industry slowly returns to normal. Still, Tepper urges investors to be cautious.
“It’s still a little too early. I would wait a little longer,” Tepper said. “The theme at least over the next few months is domestic over international travel and leisure over business travel, and when you look at Southwest, they’ve got the highest percentage of seat miles coming from domestic flights and they’re also more heavily tilted towards leisure over business.”