Hedge Funds Are Crazy About Southwest Airlines Co. (LUV)

Is Southwest Airlines Co. (NYSE:LUV) a healthy stock for your portfolio? The smart money is in a bullish mood. The number of long hedge fund bets rose by 8 lately.

In the eyes of most shareholders, hedge funds are perceived as underperforming, old investment tools of yesteryear. While there are over 8000 funds with their doors open at present, we choose to focus on the crème de la crème of this group, about 450 funds. It is estimated that this group oversees most of all hedge funds’ total asset base, and by keeping an eye on their top stock picks, we have identified a number of investment strategies that have historically outstripped Mr. Market. Our small-cap hedge fund strategy outstripped the S&P 500 index by 18 percentage points per year for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have outpaced the S&P 500 index by 23.3 percentage points in 8 months (explore the details and some picks here).

Just as important, bullish insider trading activity is another way to parse down the marketplace. There are many reasons for an upper level exec to get rid of shares of his or her company, but just one, very obvious reason why they would behave bullishly. Many empirical studies have demonstrated the useful potential of this method if piggybackers know where to look (learn more here).

Keeping this in mind, it’s important to take a peek at the latest action encompassing Southwest Airlines Co. (NYSE:LUV).

How are hedge funds trading Southwest Airlines Co. (NYSE:LUV)?

In preparation for this quarter, a total of 32 of the hedge funds we track were long in this stock, a change of 33% from the first quarter. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings significantly.

According to our comprehensive database, Edgar Wachenheim’s Greenhaven Associates had the most valuable position in Southwest Airlines Co. (NYSE:LUV), worth close to $123.9 million, accounting for 3.4% of its total 13F portfolio. Sitting at the No. 2 spot is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which held a $59.5 million position; the fund has 0.5% of its 13F portfolio invested in the stock. Other peers with similar optimism include Ric Dillon’s Diamond Hill Capital, Bruce J. Richards and Louis Hanover’s Marathon Asset Management and Gilchrist Berg’s Water Street Capital.

As one would reasonably expect, key money managers were leading the bulls’ herd. Marathon Asset Management, managed by Bruce J. Richards and Louis Hanover, created the most valuable position in Southwest Airlines Co. (NYSE:LUV). Marathon Asset Management had 27 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also initiated a $23.5 million position during the quarter. The other funds with new positions in the stock are Russell Hawkins’s Hawkins Capital, Donald Chiboucis’s Columbus Circle Investors, and Edward A. Mule’s Silver Point Capital.

Insider trading activity in Southwest Airlines Co. (NYSE:LUV)

Insider buying is particularly usable when the primary stock in question has seen transactions within the past 180 days. Over the latest six-month time period, Southwest Airlines Co. (NYSE:LUV) has experienced zero unique insiders purchasing, and 1 insider sales (see the details of insider trades here).

Let’s also examine hedge fund and insider activity in other stocks similar to Southwest Airlines Co. (NYSE:LUV). These stocks are JetBlue Airways Corporation (NASDAQ:JBLU), Alaska Air Group, Inc. (NYSE:ALK), Copa Holdings, S.A. (NYSE:CPA), Ryanair Holdings plc (ADR) (NASDAQ:RYAAY), and LATAM Airlines Group SA (ADR) (NYSE:LFL). This group of stocks are the members of the regional airlines industry and their market caps match LUV’s market cap.