Southwest Airlines: Short Interest Plunges—Should You Buy?

Key Points

• A recent geopolitical shock has sent oil prices higher unexpectedly, which might usually make investors avoid airline stocks altogether.
• Southwest Airlines proves why short sellers are on the run despite this new development, with buyers to take their place.
• Wall Street sees massive EPS growth ahead and a justified higher valuation target.

New geopolitical conflicts in the Middle East have created a new wave of uncertainty and volatility in the S&P 500 index and the rest of the global markets. However, one specific market has become the poster child of all this uncertainty, and that is the energy sector, particularly regarding oil prices. The price of oil rallied from the $60-per-barrel range to nearly close in on $80 per barrel.

Since the conflict between Israel and Iran started, Iran has decided to close down the Straight of Hormuz, a strategic and severely important location for the supply chain logistics in oil. This means that oil prices have nowhere to go but up from here. This is not good news for the transportation sector, which is heavily reliant on fuel costs, particularly for airlines.

While this would typically mean that investors will look to sell or even bet against airline stocks, recent short interest data shows that short sellers have largely left the scene when it comes to Southwest Airlines Co. NYSE: LUV. Despite a major rally in oil prices, there is a very specific reason for this behavior, which will become obvious to investors in just a bit.

Bears Run Scared From Southwest Airlines

Over the past month, up to 8.5% of Southwest Airlines' stock’s short interest declined in a clear sign of bearish capitulation in the face of what could be good news despite common opinion. Over the past quarter, investors have noted that Southwest Airlines has underperformed its peers in terms of price action.

This is because the price of oil has been stable enough to take away the smaller airline’s advantage in industry-leading fuel cost hedging operations. Southwest Airlines is known not only for being the budget-friendly and route-flexible name in the industry, but also for its tremendous ability to hedge the oil price fluctuations.

With a stable oil price, investors and strategists need not consider this advantage an attractive buying proposition. However, now that the world is quickly shifting into an oil-led rally, this one factor might be behind the bears' retreat, opening the gates for new buyers to enter and take their place.

Fundamentals Change the Narrative

Even with low oil prices in the recent past, Wall Street analysts had been running earnings per share (EPS) forecasts that landed on Southwest Airlines reporting up to 60 cents in EPS by the fourth quarter of 2025. This means that these forecasts may improve when the new high oil price environment is incorporated into financial models.

Keeping this in mind, where EPS goes, so does the stock price, and as of today, that 60-cent forecast already represents a massive jump from today’s reported net loss of 13 cents per share. That is a fundamentally rooted reason for the stock to rally and recover some of its previous highs, if not outperform its peers in the airline industry.

Another factor to consider is the potential shift in sentiment that may result from higher oil prices and potentially improved EPS forecasts for Southwest Airlines stock. As of late May 2025, analysts at Deutsche Bank decided to upgrade their ratings from Hold to Buy for the airline, also placing a valuation of up to $40 per share on it.

Compared to where it trades today, which is only 88% of its 52-week high, this valuation target would imply Southwest Airlines needs to deliver a rally of up to 27%, not to mention make a new 52-week high while at it. Investors should also remember that the date of this rating does not reflect the sudden changes in oil prices that have just occurred.

That means that when these commodity and fuel cost changes kick into financial models, Southwest Airlines’ ability to hedge and even profit off these oil price swings might push valuations even higher than that, creating a potentially higher ceiling for the stock to end up reaching toward.

Markets Place a Premium on Southwest Airlines Stock

Markets convey their sentiments about a stock's future subtly. This message is reflected in valuation metrics, especially when compared to peers and the overall market. In the case of Southwest Airlines, the message is as clear as it gets.

Trading at a price-to-earnings (P/E) ratio of up to 43.9x today, the airline calls for a steep premium compared to the peer group’s average valuation of only 8.3x today.

While some may call this expensive and filled with downside, seasoned participants will rightly say that the market always has a good reason to overpay for stocks that can deliver.

In this case, perhaps markets were already expecting some sort of supply shock or other factor to bring oil prices higher after spending a long time trading near lows, knowing that this would ultimately help bring Southwest Airlines’ prospects to new optimistic levels.