Posted January 09, 2023
By Zach Scheidt
Here's What to Do When Good Stocks Get Hurt
I'm back in my office today after traveling to Las Vegas for the Consumer Electronics Show last week. Looking at the notes I took, I've now got a lot of homework to do!
You'll undoubtedly hear more about the trip and the best tech stocks for 2023 in upcoming alerts.
But in the meantime, I want to pivot and talk about a different area of the market — and one stock in particular — that got hit recently.
As I’ll explain in a moment, we've got a great opportunity to buy this quality stock at a low price. Let's take a look!
When Bad Things Happen to Good Stocks
I'm sure you saw the news about Southwest Airlines (LUV) over the holiday break.
Thanks to bad weather and busy holiday schedules, Southwest had to cancel dozens of flights, leaving passengers stranded all over the country.
You may have been affected by the delay, or maybe you have a friend or relative who was stranded out of town.
Even last week as I flew to Las Vegas, I had a connecting flight canceled and had to jump on a later flight to get to my destination.
This week it appears the airline's operations are back to normal. But shares of LUV traded sharply lower on the news.
While the stock has started to rebound, shares are stillwell below their December high. Take a look at the chart below.
Whenever I see a situation like this where a stock trades sharply lower because of a specific event related to a company, I start asking questions like:
- Did the event cause a long-term disruption for the company?
- Are future profits likely to be affected?
- Will investors soon forget the event and buy shares again?
- Am I getting a good deal if I buy the stock today?
Sometimes when a stock trades lower, it's a sign that a problem is developing.
If it's a long-term problem, it's probably best to sell. But if it's only a temporary problem, you can buy shares at a discount and profit when the stock rebounds.
I believe this second option is what's going on with Southwest. Allow me to explain…
A Good Company With Great Profits
Airlines are going to hit some snags when bad weather moves in; that's simply the nature of the business. But long-term, shares of LUV look like a buy.
The stock is currently trading near $35.50, and the company is expected to earn $3.19 per share this year.
That means you can buy shares of LUV for just over 11 times next year's profits, an enticing value for this growing company.
Looking further down the road, Wall Street analysts expect LUV to earn $4.17 in 2024, meaning profits should grow by about 31% over the next year. Why are profits growing?
Because travelers are still making up for lost time during the pandemic and booking both personal and business trips. Strong demand should continue even if the economy slows.
Plus, since Southwest is more of a discount carrier, the airline may pick up travelers from other top-tier airlines if ticket prices become an issue.
The holiday pullback for LUV appears to be more of a buying opportunity than a signal that something is fundamentally wrong with the company.
So I believe this stock deserves consideration for your retirement account. And equally as importantly, it's good for you to understand the “why” behind any stock pullback like this.
That way you'll have a better idea of whether to buy the dip or get out before your stock trades any lower.