How to Pick the 'Right' Risky Stock

Which is the better investment right now, Southwest Airlines (LUV Quote) or Continental Airlines (CAL Quote)?

Southwest looks as if it will be the only major airline to show a profit this year, and the company likely finished the September quarter with better than $1.3 billion in cash. That makes Southwest one of the financially strongest airlines in the industry.

Continental, on the other hand, will show a loss. The most pessimistic analyst on Wall Street expects the company to lose about $10 a share in 2001. The company is best-described as financially challenged. Its debt-to-equity ratio is almost 50% higher than the airline industry average, and all of Continental's assets are already pledged to various loans, bank lines and credit arrangements.

And yet, if the downturn in airline traffic isn't worse than most Wall Street analysts expect and doesn't last significantly longer than they project, owning Continental over the next year likely will be more profitable than owning Southwest. Smith Barney, for example, is looking for a tidy 22% return on Southwest shares in a year, but a mouthwatering 69% return on Continental. ...