Which of these 2 stocks can turn out to be absolute gem? – Southwest Airlines Co. (LUV), L Brands, Inc. (LB)

The shares of Southwest Airlines Co. have decreased by more than -19.01% this year alone. The shares recently went up by 2.53% or $1.31 and now trades at $53.01. The shares of L Brands, Inc. (NYSE:LB), has slumped by -43.22% year to date as of 05/16/2018. The shares currently trade at $34.19 and have been able to report a change of 0.21% over the past one week.

The stock of Southwest Airlines Co. and L Brands, Inc. were two of the most active stocks on Wednesday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 18.66% versus 8.43%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that LUV will grow it’s earning at a 18.66% annual rate in the next 5 years. This is in contrast to LB which will have a positive growth at a 8.43% annual rate. This means that the higher growth rate of LUV implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. LUV has an EBITDA margin of 20.94%, this implies that the underlying business of LUV is more profitable. The ROI of LUV is 17.50% while that of LB is 25.90%. These figures suggest that LB ventures generate a higher ROI than that of LUV.

Cash Flow

The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, LUV’s free cash flow per share is a positive 1.97, while that of LB is positive 7.8.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for LUV is 0.70 and that of LB is 1.60. This implies that it is easier for LUV to cover its immediate obligations over the next 12 months than LB.


LUV currently trades at a forward P/E of 10.11, a P/B of 3.23, and a P/S of 1.47 while LB trades at a forward P/E of 10.61, and a P/S of 0.80. This means that looking at the earnings, book values and sales basis, LUV is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions

The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of LUV is currently at a -22.28% to its one-year price target of 68.21. Looking at its rival pricing, LB is at a -23.73% relative to its price target of 44.83.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), LUV is given a 1.80 while 2.70 placed for LB. This means that analysts are more bullish on the outlook for LB stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for LUV is 2.18 while that of LB is just 3.36. This means that analysts are more bullish on the forecast for LUV stock.


The stock of Southwest Airlines Co. defeats that of L Brands, Inc. when the two are compared, with LUV taking 5 out of the total factors that were been considered. LUV happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, LUV is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for LUV is better on when it is viewed on short interest.

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