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Southwest Airlines (NYSE: LUV) stock will be in focus on Monday, June 10, after reports of Elliott Management building a position of $2 billion in the airline has emerged. Elliott Management is known for forcing management changes in the companies in which it builds positions. Southwest has underperformed some of is peers this year, with its stock down around 5%, while Delta Air (NYSE:DAL) and United Airlines (NASDAQ:UAL) have seen their stock rise by over 25%.

Southwest Airlines is facing headwinds from the issues that have plagued Boeing’s production of 737 MAX aircraft. Southwest now expects only 20 aircraft deliveries this year, compared to 79 it anticipated earlier. Furthermore, the company recently decided to shut down its operations in four airports – Cozumel International Airport in Mexico, Bellingham in Washington, Syracuse in New York, and George Bush Intercontinental Airport in Houston, Texas. The airline struggles to expand its network capacity.

These factors have weighed on its stock performance lately. Even if we look at a slightly longer term, LUV stock hasn’t fared that well. LUV stock has suffered a decline of 35% from levels of $45 in early January 2021 to around $30 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Notably, LUV stock has underperformed the broader market in each of the last three years. Returns for the stock were -8% in 2021, -21% in 2022, and -14% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that LUV underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LUV face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, LUV stock looks like it has little room for growth. We estimate Southwest Airlines’ Valuation to be $31 per share, compared to its current market price of around $28. Our forecast is based on 0.7x sales for Southwest, aligning with the stock’s average over the last two years. However, if Elliott Management is able to get a seat or two on Southwest’s board and force them to make changes for better long-term growth, it is likely that LUV stock may see much higher levels in the coming years.

[1] Returns as of 6/10/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.