Why Elliott Investment Management's Stake in Southwest Airlines is a Big Deal

Elliott Falls in $LUV

Watch the video or read the article below.

I heard about the activist investor coming into Southwest Airlines (NYSE:LUV), and it reminded me of one of my favorite sayings:

“The only two things I don’t invest in are airliners and restaurants” - attributed to Warren Buffett.

Buffett often shares his investment wisdom, emphasizing the importance of investing within one's "circle of competence" and avoiding industries with high volatility and low margins, such as airlines and restaurants.

Ironically, my first restaurant venture was in 2020, and we opened on Friday, March 13th (as if that wasn’t a bad enough omen), just days before the entire world shut down on March 16th, 2020. (I’ve at least made my money back and then some, so it’s not all that bad)

I digress. Airlines have long been non-starters for me.

It's just too competitive, with high fixed and variable costs, fuel price volatility, economic cyclicality, low margins, regulatory and security issues, labor costs, and more - it's a race to the bottom.

So, I avoid it.

But this got me thinking:

Why would Elliott Investment Management buy an 11% stake in Southwest, valued at $1.9 billion?

What I found was quite interesting.

Southwest is trading at 19.52x their forward profit estimates, compared with United's 4.74x and the industry average of 7.19x. Their stock is down 53% in three years (though up 3% this year), and they're lagging behind the index and competitors.

The S&P 500 has seen a roughly 12% rise, while shares of rival Delta (DAL) and United (UAL) have gained more than 25%.

The situation with Southwest Airlines is unfolding like a modern-day version of the classic film "Wall Street." In the film, Gordon Gekko, a ruthless corporate raider, famously declares, "Greed, for lack of a better word, is good," as he aggressively takes control of companies to maximize shareholder value.

Similarly, the activist investor in Southwest Airlines, with their $1.9 billion stake, is determined to oust the CEO after disappointing performance.

Just as Gekko aimed to shake up complacent management and implement bold changes, this investor is seeking to install their own leader to revitalize the airline and steer it back to financial success.

But why, when they’re trading 3x higher than the nearest competitor?

Elliott Investment Management is a prominent American investment firm founded by Paul Singer in 1977. Known for their aggressive activist strategies, they acquire significant stakes in public companies and push for changes to increase shareholder value. Managing approximately $65 billion in assets, they are one of the most successful and influential activist investors globally.

So I started digging some more…

Here are some notable examples of Elliott Investment’s activism in public companies:

AT&T:

In 2019, Elliott disclosed a $3.2 billion stake in AT&T and issued a letter outlining a plan to improve the company's performance. The firm pushed for strategic reviews, asset sales, and better capital allocation, leading to AT&T selling its DirecTV and WarnerMedia units.

❌ Price in 2019: $40.00. Price today? $17.00 (Down 60%)

eBay:

In 2019, Elliott took a significant stake in eBay and sent a letter to the board suggesting strategic changes, including selling off non-core assets like StubHub and the eBay Classifieds Group. eBay eventually sold StubHub for $4 billion and the Classifieds business for $9.2 billion.

✅ Price in 2019: $39.00, Price today: $53.00 (Up 35%)

Twitter:

In 2020, Elliott acquired a stake in Twitter and called for the removal of CEO Jack Dorsey, citing concerns over his dual role as CEO of both Twitter and Square. Although Dorsey remained CEO initially, Elliott secured board seats and influenced strategic decisions. Dorsey eventually stepped down as CEO in late 2021.

✅ Price in 2020: $40 Average. Price when Elon bought it: $54.20. (Up 35%)

Samsung:

In 2015, Elliott launched a campaign against Samsung's restructuring plans and pushed for better shareholder returns. The firm advocated for a split of the company into a holding and an operating company, a significant dividend payout, and the listing of Samsung Electronics on a U.S. exchange. While not all demands were met, Samsung increased dividends and improved governance.

✅ Price in 2015: $500. Price today: $1400 (Up 180%, while AAPL has moved up 839%)

BHP Billiton:

In 2017, Elliott took a stake in BHP Billiton and pushed for the mining giant to restructure by spinning off its U.S. oil business, implementing cost cuts, and increasing shareholder returns. BHP later sold its U.S. shale assets and increased shareholder returns through buybacks and dividends.

✅ Price in 2017: $1400. Price today: $2200 (Up 57%)

Arconic:

In 2017, Elliott engaged in a high-profile battle with Arconic, a spin-off of Alcoa, pushing for CEO Klaus Kleinfeld’s ouster and changes in the board and strategic direction. Kleinfeld resigned, and Elliott eventually gained significant influence over the company’s direction.

✅ Price in 2017: $25. Price in 2023 when it was acquired by Apollo Global Management: $30. (Up 20%)

Elliott's track record shows they're successful 5 out of 6 times with their predictions on the examples I dug up.

However, the cumulative return for the S&P 500 from January 2015 to mid-2024 is around 172.18%, and from 2017 it’s 163%.

So, you’d be better off investing in the S&P 500 and saving the thousands of hours of countless phone calls, zoom’s, and emails required to complete the activism approach.

It appears that way; however, where does all this go?

Well, it appears they’re not beating the S&P, but according to their site, Elliott has a strong track record of returns, especially given its long history in the hedge fund industry.

Over its four-decade history, Elliott has achieved an average annual rate of return of approximately 13.4%, which is quite impressive compared to many other funds in the market.

All that said, Southwest is their latest "target," so it’ll be interesting to see how this one plays out.

Given their track record of success, there could be a trade in this.

The average return of the stocks in which Elliott has invested, based on the data I dug up, is approximately 44.5%.

Note this article is being written on June 18th, 2024, and Southwest’s price is $28.33. A 44.5% move north would put this at $40.94.

Their average investment (of their top 20) lasts for about 5.2 quarters or approximately 1.3 years, and their top 10 investments for about 3.9 quarters or roughly 0.975 years.

So, is a 44.5% move on the table over the next 1-1.3 years?

Would you wait 1 year for a 44.5% return? I certainly would, and that’s the average... so it’s certainly possible in my view.

Let's see how they do - I’ll keep you updated.

Let me know if you’re taking a position in Southwest. (LUV 0.00%↑)

Happy Hunting!