There’s been a lot of talk in the media lately about a major shift in market leadership from growth stocks to value stocks, but value investors always have to be careful of falling into a value trap. Today I’m going to take a look at Southwest Airlines Co (LUV) stock to determine if it is a value…or a value trap.
Making that distinction can make you an awful lot of money. Failing to make it can be awfully expensive.
Don’t Let LUV Be a Trap
There are a handful of standard metrics that value investors look for in a stock. The simplest, most popular metric is the P/E ratio. Historically, the S&P 500’s P/E ratio sits around 15, but it varies throughout market cycles, typically ranging from the low teens to the low 20s.
But you should be careful not to go looking for LUV (or any other stock, for that matter) in all the wrong places.
The biggest mistake an inexperienced value investor can make is blindly screening for great value stocks with low P/Es. A screen like that might lead you to a stock like GoPro (GPRO). As recently as December, GPRO had a sub-15 P/E. However, a quick look at GoPro’s net revenue, income, and EPS shows why the stock ended up being huge value trap.
All three of these metrics peaked for GoPro and began trending in the wrong direction. Not surprisingly, the low P/E didn’t last for long and neither did the potential value of the stock.
Is There Value in Southwest Airlines Stock?
First, LUV stock has…
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