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Jumping Without A Parachute: Southwest Airlines Insiders Selling Out At The Wrong Time

Mar. 09, 2021 2:01 AM ETSouthwest Airlines Co. (LUV)14 Comments
Kevin Mackie profile picture
Kevin Mackie


  • Substantial insider selling recently at Southwest Airlines calls into question current valuation.
  • Using insider trading to make buy/sell decisions can only be effective if the insider is also a good investor, knowing when to buy or sell their own shares.
  • A discounted cash flow analysis helps cut through the noise.

Investors too often speak in overly clear-cut terms when analyzing insider trades: insider buys are always good, and insider selling isn't necessarily bad. Both these situations should be viewed with more nuance, namely that insider trades are only a reliable source of actionable data if the insider is actually a good investor. If the insider is a poor appraiser of business prospects or valuation, then their insider moves should actually be taken as a counter-indicator: buy when they sell and sell when they buy. I spoke of this back in an April 2020 article where I wrote:

Peter Lynch is... often quoted as saying that, "There are many reasons insiders sell, but only one reason insiders buy: they think the price will rise." This quote has been repeated so much it is a platitude in my opinion. Most investors interpret it to mean that insider buys are always a good thing, a likely sign that the stock is headed up. There is good logic, or shall we say conventional wisdom, backing up that interpretation. After all, insiders should be the ones best acquainted with the business proper. We should trust them, right? The main thing that is over-looked with all this is the THINK part of the Lynch quote, they think the price will rise. How much trust should be placed on what insiders think?

We should only place trust in insider trades if we also trust their capacity as an investor. Some CEOs might be great at running their business, but really bad at knowing when their stock has a good value. Buy or sells by them should be put under more of a microscope.

My intent with today's article is to do just that. Substantial insider selling has occurred recently at Southwest Airlines (NYSE:LUV). That selling happened

This article was written by

Kevin Mackie profile picture
Value strategies resonate with me, and I don't relegate myself to any sector or industry. You could say I am an equal opportunity investor: if a company meets my investment criteria, I will buy. Big picture, I look for three main things in a stock before I consider it for investment: Does the company have a product or service that will be in demand in the future? Does the company have a demonstrated history of success and are they on solid financial footing today (i.e., a manageable debt load and strong cash flow generation)? Can I purchase their stock for a reasonable price? If I can verify each of these things, I then look at how that company deploys their free cash flow to enrich their shareholders. Capital allocation is key. Money needs to be spent on the right thing at the right time, meaning that debt reduction should be prioritized over a dividend in most instances. Annual reports are also important to find any red flags or factors that strengthen the case for investment. That is the skeleton of my process, and it has served me well thus far. I appreciate engaging in intelligent dialogue with the SA community and look forward to learning with other users.

Analyst’s Disclosure: I am/we are long LUV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (14)

Kevin Mackie profile picture
Update: Robert Jordan, EVP of Corporate Services, sold 10% of his position on the 8th of March.
I initiated a position and loaded up around $33 back in June 2020. I plan to hopefully hold forever since LUV is best of breed. Will be great when it reinstates its dividend too!
I think we need a more defined 1 year price target
kthor profile picture
sold LUV near highs, bought soaring eagle ..hopefully another double bagger soon!
It's the universal question: If you sell LUV, what do you do with the proceeds? It's about the safest choice in airlines. It's reflecting a largely overextended market.
Boilermaker_KK profile picture
Life is complex. Investing is complex. When insiders sell, it doesn’t need to be complex. If the same insiders (several) who competently run the operations are selling significant lots ... then rule 1 - do NOT buy, followed by rule 2, pare or eliminate your risk.

Rule 3 - in spite of our human nature to have overinflated visions of self-worth, we have less information than insiders. You better have 200% conviction in position ... or see rule 2.

This is not complex. It is simple.
Kevin Mackie profile picture
@Boilermaker_KK It is complex. Inescapably. Primarily due to the fact that we will never REALLY know why they sold. Maybe they needed the money to put a down-payment on a house. Maybe they think the stock is over-valued. Maybe they don't have a clue about valuation, and instead just looked at a chart and decided this was a "top" and so they unloaded. Your rules are full of holes. But if they work for you, splendid.
Boilermaker_KK profile picture
@Kevin Mackie

The rules do work for me. Thank you.

I’m a long-time former insider (not LUV). You have intimate knowledge of the company when you are an insider. You are solely focused on running the company and increasing its value 24/7/365 ... if you are any good. And you know when the market is getting ahead of itself with respect to your financial planning and likely future results. When that occurs, you are prudent to take money off the table. That is almost assuredly what has happened. But that, as you know, doesn’t equate into a market share price drop. But, it certainly indicates and portends that the market risk to the share price has gone up. Measurably.

All of the officers are not selling to expand home improvements. Laughable. Please, be careful here on LUV.

Full disclosure: Not long equity. Not short equity. Bondholder only.
Kevin Mackie profile picture
@Boilermaker_KK Having an intimate knowledge of your company does not automatically translate into knowledge of how to appropriately value stock. Even your own. The "if you are any good" part of your post is critical. Most board members and even most corporate executives aren't worth much. They don't do anything to increase value.
Very useful perspective, thank you. I bought LUV in April 2020 & my cost basis is $29. I recently took some profits when the share price shot up to $59.60 but it is still a significant holding in my portfolio because I think it is a well run business. Also, I believe it may increase its market share as a result of the COVID-19 due to it’s better balance sheet compared to other airlines & it’s focus on domestic travel.
tell me why LUV is worth more now than it was in all of 2019?
southwest was fully booked in 2019.
I can't see performance doing better than that in 2021-2022
Kevin Mackie profile picture
@pman62 Well that completely depends on how you define "worth". I define worth on the basis of how much cash a company can generate in the future, summed together and discounted back to the present. Sounds like you might define worth on the basis of where millions of emotional market participations price the stock on any given day, week, month, or year.
@pman62 can you please tell us why S&P and Nasdaq are up by high % in last one year? Can u pls advise how gene editing shares and many tech stocks increased 500-1500%. Answer is simple, flooding of money. Now consider which one is better bet, to buy a tech stock with 400$m revenue and market cap of 60-80 billion or Southwest Airlines? If you are not convinced yet, let’s talk after 2 months when LUV will be 75+. Just to share, I bought Delta and Southeast exactly same day Buffet sold it. No, I am not saying I am smarter than him. But I know I am having a high percentage gain in my items. And I will sell to realise some of it
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