Schaeffer's Trading Floor Blog

Weekly Contrarian: Is Southwest Airlines Ready to Fly Higher?

Pessimism is steep on outperforming LUV

by 1/24/2013 2:44 PM
Stocks quoted in this article:

In a recent Time article entitled, "Ugh, More Airline Fees: Want a Decent Seat on Southwest? Pay Up," the author argues that Southwest Airlines Co.'s (NYSE:LUV - 11.44) benevolence toward customer satisfaction (i.e. lack of additional travel fees) has kept the airliner successful. However, in keeping up with the status quo, LUV is now passing on the costs of the once-complementary services to the consumer. As the writer notes, "Southwest seems to be embracing the approach of other airlines, in that clearly better service goes to customers who pay for it." While the additional fees only clear the path to more profits, the journalist concludes that, "Passengers who don't pay can expect worse treatment, as simple services — like getting a fair shot at a decent seat on the plane -- are now viewed as revenue streams, as perks saved for the elite."

Takeaway

LUV has had a solid showing on the charts for some time now. In addition to sporting a year-over-year advance of roughly 20%, the stock has outpaced the broader S&P 500 Index (SPX) by nearly 24 percentage points during the past three months. What's more, the equity tagged a new annual high of $11.61 in today's session following this morning's well-received fourth-quarter earnings results.

Despite this upward momentum, Wall Street remains skeptical of LUV. In the options pits, the stock's 50-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) put/call volume ratio of 4.73 ranks higher than 94% of other such readings taken in the past year. In other words, puts have been bought to open over calls at a near annual-high clip in recent months.

Additionally, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.84 ranks in the 80th percentile of its annual range, indicating short-term speculators are more put-heavy than usual toward the stock. This trend has translated into a front-month gamma-weighted SOIR of 1.44 for LUV, meaning near-the-money put open interest outweighs call open interest in the February series of options. Going forward, this heavy accumulation of puts could provide an options-related foothold for the security, as these contracts begin to unwind over the next three weeks.

LUV could also encounter some contrarian tailwinds outside of the options arena. No fewer than six out of 13 analysts still maintain a "hold" or worse suggestion toward the outperforming equity. Plus, the consensus 12-month price target of $12.69 is a tepid 9.3% premium to today's technical milestone. A round of upgrades and/or price-target hikes from this skeptical crowd could provide a fresh wave of buying power for the stock.


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