Can Another Upgrade Keep Southwest Flying (NYSE: LUV)?

With a 2.5% drop on Tuesday, it meant that Southwest Airlines’ (NYSE: LUV) shares are now down 20% from their June high. In the normal course of events, this would be considered a bear market or a full-blown correction for the stock, but in the context of COVID-19, a move like that isn’t what it used to be.

Many investors are instead focusing on the fact that shares are still up 50% from their May lows, having at one stage in June been up close to 90%, so this cooling-off is somewhat to be expected and in a way, healthy. Indeed, for an industry that ground to an absolute and abrupt halt earlier this year, there’s something to be said for the fact that Southwest, along with its peers American (NASDAQ: AAL), Delta (NYSE: DAL) and United (NASDAQ: UAL) are all still standing.

Out of these four major airlines, Southwest has recovered the most from the catastrophic Q1 that the industry experienced and this hasn’t gone unnoticed.

Two Notch Jump

On this past Monday, Goldman Sachs were out with a two notch upgrade on the stock, moving them straight from a Sell to a Buy, skipping the Neutral step in a bullish move. Analyst Catherine O’Brien said in a note to clients "we now expect traffic for the carriers in our coverage universe to recover to 2019 levels in 2023 as opposed to 2022. We expect Southwest’s primarily domestic network and industry-leading balance sheet to drive a relatively faster and stronger recovery from the COVID-19-driven downturn in demand for air travel."

This kind of forward-thinking in relation to Southwest’s position among the majors has clearly been working its way around Wall Street for a few months. When we look at how bad things got for some of the airlines, with a view towards seeing how bad they might get again if fresh travel restrictions are rolled out, Southwest was the only one that could be said to have avoided ending up on the ropes.

Travel stocks were starting to be sold hard by the end of January as the coronavirus became an international pandemic instead of just an east Asian pandemic. While it took another few weeks for the broader market to plummet, the likes of airlines and cruise ships were already sinking fast. Still, through the initial lows of March, Southwest shares refused to close lower than 45% from their pre-COVID levels. That didn’t stop American, Delta and United closing down 60%, 62% and 73% respectively. With the first hard bounce of those lows, Southwest managed to get back to being only 20% off its pre-COVID levels while the others still languished below 50%.

Second Wave

As tech and e-commerce stocks ripped higher through April and May, travel names, particularly airlines, dipped again. And just like the first dip, Southwest fell the least and has recovered the most. In early June, Southwest ripped higher to match its previous bounce to only be down 20% overall. The TSA was reporting consistent weekly gains in passenger numbers while international flights were starting to be scheduled for the fall. For a brief period, it looked like the worst was over and investors were scrambling to get back into equities, including those that had been hardest hit.

However, this momentum has been weakened in the weeks since new daily coronavirus cases skyrocket in states across the country. Brick and mortar stores are starting to cancel planned and much-awaited reopenings as authorities struggle to avoid a second wave. States like New Jersey, New York, and Connecticut are imposing mandatory 14-day quarantines for arriving visitors which is in and of itself a major deterrent. The EU is also expected to extend its ban on US visitors. Just like last January and February, on the front line of the stock market as these fears materialize is the travel industry.

That being said, at least airline investors have been through this before and have some idea of what to expect. Should the industry grind to a halt again, we know which of the airline stocks is most likely to come out of it in the best shape.