Is Southwest Airlines Co. (LUV) A Good Stock To Buy?

Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Southwest Airlines Co. (NYSE:LUV).

Southwest Airlines Co. (NYSE:LUV) investors should pay attention to a decrease in hedge fund sentiment in recent months. Our calculations also showed that LUV isn’t among the 30 most popular stocks among hedge funds.

In the 21st century investor’s toolkit there are many signals stock traders put to use to grade their holdings. A duo of the less known signals are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the best picks of the best investment managers can outpace the market by a healthy amount (see the details here).

John Overdeck of Two Sigma

Let’s take a look at the new hedge fund action encompassing Southwest Airlines Co. (NYSE:LUV).

What does the smart money think about Southwest Airlines Co. (NYSE:LUV)?

At the end of the first quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the fourth quarter of 2018. By comparison, 41 hedge funds held shares or bullish call options in LUV a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.


Of the funds tracked by Insider Monkey, Berkshire Hathaway, managed by Warren Buffett, holds the biggest position in Southwest Airlines Co. (NYSE:LUV). Berkshire Hathaway has a $2.7849 billion position in the stock, comprising 1.4% of its 13F portfolio. On Berkshire Hathaway’s heels is AQR Capital Management, led by Cliff Asness, holding a $188.2 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish consist of D. E. Shaw’s D E Shaw, Gilchrist Berg’s Water Street Capital and John Overdeck and David Siegel’s Two Sigma Advisors.

Judging by the fact that Southwest Airlines Co. (NYSE:LUV) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of money managers that slashed their entire stakes last quarter. At the top of the heap, Paul Reeder and Edward Shapiro’s PAR Capital Management sold off the largest stake of the 700 funds followed by Insider Monkey, valued at close to $226.3 million in stock. Robert Bishop’s fund, Impala Asset Management, also cut its stock, about $99.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Southwest Airlines Co. (NYSE:LUV). We will take a look at Pinduoduo Inc. (NASDAQ:PDD), IQVIA Holdings, Inc. (NYSE:IQV), Amphenol Corporation (NYSE:APH), and Fortive Corporation (NYSE:FTV). All of these stocks’ market caps resemble LUV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PDD 32 496446 12
IQV 64 5288724 15
APH 25 518087 4
FTV 26 472153 -4
Average 36.75 1693853 6.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.75 hedge funds with bullish positions and the average amount invested in these stocks was $1694 million. That figure was $3384 million in LUV’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand Amphenol Corporation (NYSE:APH) is the least popular one with only 25 bullish hedge fund positions. Southwest Airlines Co. (NYSE:LUV) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately LUV wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); LUV investors were disappointed as the stock returned -4.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.

Disclosure: None. This article was originally published at Insider Monkey.