1. Southwest Airlines Co. (NYSE:LUV)
Consensus ROE: 49%
Number of Hedge Fund Investors in Q2 2024: 23
Southwest Airlines Co. (NYSE:LUV) is one of the biggest airlines in America with 817 aircraft in its fleet. Compared to the S&P’s airline index, which is up by 21% year to date, its stock has gained just 7.15%. This has been because of Southwest Airlines Co. (NYSE:LUV)’s massive 16% share price drop in March, which stemmed from the current turmoil facing the airline industry due to Boeing’s production woes. Back then, it was estimated that Southwest Airlines Co. (NYSE:LUV) would receive 46 Boeing 737 MAX airplanes compared to the earlier estimate of 58 planes. This ‘turbulence’ has shifted the narrative around the airline, with activist investor Elliot Management also disclosing a stake in it in June. Now, Southwest Airlines Co. (NYSE:LUV) aims to increase the revenue that it can earn from existing passengers and run redeye flights that target underserved time slots. Consequently, its success in these initiatives will drive the stock’s performance.
Southwest Airlines Co. (NYSE:LUV)’s management commented on these initiatives during the Q2 2024 earnings call:
“Our research shows that 80% of our customers prefer an assigned seat, and 86% of our potential customers prefer an assigned seat. Further, when a customer defects from Southwest to one of our competitors, our open seating policy is cited as the number one reason why. The answer is clear, there is more demand for Southwest Airlines with an assigned seating model, and there is a significant ability to monetize the cabin more effectively with a premium seating option.
By extension, these changes are expected to drive significant value for our shareholders. We feel confident that the solution we are implementing will retain the positive elements of the Southwest Airlines experience and enable us to evolve in a manner that’s consistent with what today’s air traveler is seeking. While specific cabin layouts are still being finalized, we expect roughly one-third of seats across the fleet to offer extended legroom. We’re also designing a boarding process that retains the organized com our customers enjoy today, but also complements an assigned seating model. We’ve been studying this in depth to preserve our operational efficiency and how quickly we turn an aircraft. We’ve conducted both live boarding tests to understand passenger movement in a real world environment and also more than 8 million digital simulations to test different boarding options.”
LUV is one of the top stocks with the highest consensus ROE according to Goldman Sachs. While we acknowledge the potential of LUV as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LUV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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