I'm examining a pairs trading strategy featuring Southwest Airlines Co. (LUV) and Alaska Air Group, Inc. (ALK). These are two significant players in the domestic airline sector. Both airlines have their own set of merits and challenges, which opens up a trading opportunity. I'm contemplating going long on LUV and short on ALK, capitalizing on their unique differences and aiming for a reversion to their historical performance relationship.
Why Go Long on Southwest Airlines Co. (LUV):
Valuation: LUV has a P/E ratio of 29.67, which is slightly higher than ALK's P/E of 27.84. However, LUV's forward P/E of 11.56 is more attractive compared to ALK's forward P/E of 5.84, offering better growth prospects.
Profitability: LUV's ROA and ROE stand at 1.55% and 5.30% respectively. Though these are similar to ALK's, LUV's anticipated growth in EPS for the next year is 35.28%, suggesting better future profitability.
Performance Metrics: LUV has been underperforming with a YTD drop of -23.83%, but its higher EPS growth rate for the next year makes it a candidate for a rebound.
Why Short Alaska Air Group, Inc. (ALK):
Valuation: ALK's P/E ratio of 27.84 and forward P/E of 5.84 may look attractive, but when adjusted for growth (PEG), ALK’s 1.63 is less appealing, indicating a potential overvaluation.
Short Interest: ALK has a short float of 3.41%, hinting at some degree of negative sentiment, which makes it a candidate for a short position.
Profitability: ALK’s ROA and ROE are 1.08% and 4.13% respectively, and it has a lower projected growth rate for next year, making it less appealing for a long position.
Performance Metrics: ALK's recent performance has been troubling, with a decline of -35.85% in the last quarter and -18.21% over the last year, reinforcing the short decision.
Decision:
Long on 1 LUV
Short on 1 ALK
Why Go Long on Southwest Airlines Co. (LUV):
Valuation: LUV has a P/E ratio of 29.67, which is slightly higher than ALK's P/E of 27.84. However, LUV's forward P/E of 11.56 is more attractive compared to ALK's forward P/E of 5.84, offering better growth prospects.
Profitability: LUV's ROA and ROE stand at 1.55% and 5.30% respectively. Though these are similar to ALK's, LUV's anticipated growth in EPS for the next year is 35.28%, suggesting better future profitability.
Performance Metrics: LUV has been underperforming with a YTD drop of -23.83%, but its higher EPS growth rate for the next year makes it a candidate for a rebound.
Why Short Alaska Air Group, Inc. (ALK):
Valuation: ALK's P/E ratio of 27.84 and forward P/E of 5.84 may look attractive, but when adjusted for growth (PEG), ALK’s 1.63 is less appealing, indicating a potential overvaluation.
Short Interest: ALK has a short float of 3.41%, hinting at some degree of negative sentiment, which makes it a candidate for a short position.
Profitability: ALK’s ROA and ROE are 1.08% and 4.13% respectively, and it has a lower projected growth rate for next year, making it less appealing for a long position.
Performance Metrics: ALK's recent performance has been troubling, with a decline of -35.85% in the last quarter and -18.21% over the last year, reinforcing the short decision.
Decision:
Long on 1 LUV
Short on 1 ALK