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Southwest Airlines Co. (LUV): Are Hedge Funds Right About This Stock?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Southwest Airlines Co. (NYSE:LUV) based on that data and determine whether they were really smart about the stock.

Is Southwest Airlines Co. (NYSE:LUV) ready to rally soon? Hedge funds were betting on the stock. The number of bullish hedge fund bets advanced by 1 lately. Our calculations also showed that LUV isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). LUV was in 45 hedge funds’ portfolios at the end of March. There were 44 hedge funds in our database with LUV positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

To most stock holders, hedge funds are seen as slow, old financial vehicles of years past. While there are greater than 8000 funds trading at the moment, We choose to focus on the top tier of this club, approximately 850 funds. These money managers preside over the lion’s share of the hedge fund industry’s total capital, and by watching their best picks, Insider Monkey has identified many investment strategies that have historically exceeded the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Paul Reeder PAR Capital Management

Paul Reeder of PAR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a look at the new hedge fund action regarding Southwest Airlines Co. (NYSE:LUV).

Hedge fund activity in Southwest Airlines Co. (NYSE:LUV)

Heading into the second quarter of 2020, a total of 45 of the hedge funds tracked by Insider Monkey were long this stock, a change of 2% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LUV over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Southwest Airlines Co. (NYSE:LUV) was held by Berkshire Hathaway, which reported holding $1910.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $124.1 million position. Other investors bullish on the company included AQR Capital Management, Citadel Investment Group, and Holocene Advisors. In terms of the portfolio weights assigned to each position Water Street Capital allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 2.76% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, dishing out 2.64 percent of its 13F equity portfolio to LUV.

As one would reasonably expect, some big names were leading the bulls’ herd. Sandbar Asset Management, managed by Michael Cowley, established the largest position in Southwest Airlines Co. (NYSE:LUV). Sandbar Asset Management had $3.9 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also made a $2.4 million investment in the stock during the quarter. The other funds with brand new LUV positions are Greg Eisner’s Engineers Gate Manager, Sara Nainzadeh’s Centenus Global Management, and Paul Reeder and Edward Shapiro’s PAR Capital Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Southwest Airlines Co. (NYSE:LUV) but similarly valued. These stocks are DTE Energy Company (NYSE:DTE), Delta Air Lines, Inc. (NYSE:DAL), AmerisourceBergen Corporation (NYSE:ABC), and Chipotle Mexican Grill, Inc. (NYSE:CMG). This group of stocks’ market caps match LUV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DTE 29 516788 -6
DAL 53 2970479 -17
ABC 41 634674 1
CMG 48 2674255 0
Average 42.75 1699049 -5.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.75 hedge funds with bullish positions and the average amount invested in these stocks was $1699 million. That figure was $2345 million in LUV’s case. Delta Air Lines, Inc. (NYSE:DAL) is the most popular stock in this table. On the other hand DTE Energy Company (NYSE:DTE) is the least popular one with only 29 bullish hedge fund positions. Southwest Airlines Co. (NYSE:LUV) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately LUV wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LUV were disappointed as the stock returned -4% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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