Every company has some kind of uncertainty surrounding it at some point. The market doesn’t like uncertainty, and will likely price shares of a company with an uncertain outlook too low. It’s only when the market is certain about a company’s performance that shares will be priced for perfection.
Many companies have seen uncertainties flare up, often from some kind of legal or regulatory issue that can weigh on the stock. The time to buy is when that uncertainty ends.
For instance, the FAA recently gave a record fine to Southwest Airlines (LUV) for travel disruptions the airline experienced last year. This year has already experienced similar issues, albeit on a far smaller scale.
However, Southwest is taking steps to improve operations. And with the uncertainty of how big of a fine now known, shares look ready to start moving higher. That’s especially true given strong travel demand and moderate energy prices.
Action to take: Southwest shares are already trending higher from their October lows. That trend should continue in the months ahead. Shares are inexpensive at 11 times forward earnings.
For traders, the continued uptrend bodes well for call option buyers. The March $30 calls, last going for about $1.70, could see mid-to-high double-digit gains on a continued uptrend for shares in the coming months.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.