The airline industry as a whole is being hit right now with a drop in travel demand and rising costs. One of the major players, Southwest (LUV), is feeling these effects and issued a warning about how they will affect operating costs and profitability.

The airline company said that it’s seen a drop in close-in leisure bookings in August. However, the overall demand for leisure bookings appears steady – and Southwest still expects a slight uptick in corporate travel during the third quarter.

That being said, the concern is less over bookings, and more over rising costs. Fuel costs, to be exact. While Southwest initially forecasted fuel costs per gallon in the range of $2.55 to $2.65, it now projects these to rise to a range between $2.70 to $2.80. This is one of the largest costs for airliners, which has sparked some worry among analysts and investors.

Extreme summer weather events also took their toll on Southwest’s performance. Hurricane Hillary and Idalia, the wildfires in Maui, and other storms have left planes grounded and cut into the forecasted travel volume.

As a result of all this, several analysts with Bank of America lowered their price targets for not just Southwest, but a multitude of airliners. Revenue is expected to improve across the board in the third quarter, but the rising costs of jet fuel will cut into the profitability of the companies. 

While LUV initially fell almost 5% in pre-market trading, the stock has recovered a large chunk of those losses since the opening bell sounded. Right now the stock sits just about 2% lower than it closed at in Tuesday’s trading session.

That being said, the stock is now down 8% in the past month and 19% in the last year. Is it time to cut losses on this stock, or is there any reason to remain optimistic and weather the storm?

No need to play the guessing game or make a decision based on emotion. We’ve taken a look at the current situation for LUV through the VectorVest stock analysis software and have 3 things you need to see before you make your next move.

LUV Has Excellent Upside Potential, But Poor Safety and Timing

The VectorVest system simplifies your trading strategy through a proprietary stock-rating system. It’s outperformed the S&P 500 by 10x over the past 20 years and counting. It’s all based on 3 ratings: relative value (RV), relative safety (RS), and relative timing (RT).

Each of these sits on a simple scale of 0.00-2.00, with 1.00 being the average. Based on the stock’s overall VST rating, the system issues a clear buy, sell, or hold recommendation - at any given time! As for LUV, here’s the current situation:

  • Excellent Upside Potential: LUV stock has been battered recently and it now sits at a low point where it has excellent upside potential, with an RV rating of 1.40. The RV rating is a comparison between a stock’s long-term price appreciation potential and AAA corporate bond rates and risk. Moreover, the stock is undervalued with a current value of $46.79/share.
  • Poor Safety: The RS rating is an indicator of risk and speaks to a company’s financial consistency & predictability, debt-to-equity ratio, and business longevity. As for LUV, the RS rating of 0.81 is considered poor.
  • Poor Timing: As you can see by looking at how the stock has performed in both the short and long term, the timing is poor for LUV right now - and the RT rating of 0.63 confirms this. This rating is based on the direction, dynamics, and magnitude of the stock’s price movement day over day, week over week, quarter over quarter, and year over year.

The overall VST rating of 0.96 is considered fair for LUV, but where does that leave you as an investor? Should you buy, sell, or hold this stock? Get a clear answer on your next move with a free stock analysis at VectorVest today!

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VectorVest advocates buying safe, undervalued stocks, rising in price. LUV has excellent upside potential, but the stock’s safety and timing are poor. This company has been battered by lower demand and rising operating costs, and it doesn’t appear that this will change in the near term.

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