“When we sell something, very often it’s going to be our entire stake: We don’t trim positions.” With this, Warren Buffet sold off his entire stakes in top US Airlines.
Warren Buffet, better known as the Oracle of Omaha did precisely as he stated. He had purchased his first stock at the age of 11 working alongside in his family’s grocery store in Omaha. He learned the fundamentals of the value of investing under the mentorship of Benjamin Graham at Columbia University.
The theory of value investing states that an investor should buy and hold a common stock if the intrinsic value is more than the current price. Over time, the market price and intrinsic price will converge towards each other until the stock price reflects its true value. By buying an undervalued stock, the investor is, in effect, paying quite less and should only sell when it’s trading at its intrinsic worth. However, the effect of price convergence is bound to happen only in an efficient market.
“The Airline Business has changed in a very major way”- saying so, he explained his investment vehicle- Berkshire Hathaway’s motivation to sell major stakes in a host of marquee names such as Delta Airlines, United Airlines, Southwest and American. The grounding of airline stocks by the wizard of value investing leads to tremors in the world of investment. The conglomerate, by virtue of the sheer size of its holdings, had an 11.12% or almost 71mn shares in Delta being the single largest shareholder, 10.54% or nearly 54mn shares of Southwest being the second-largest shareholder, 10.05% or 42.5mn shares of American Airlines and 8.85% or 22mn shares of United being the third and second-largest stakeholder respectively.
In 2016, Berkshire paid between $7-8bn to buy 10% of the “Big 4” airlines in the United States. April’s sale of these positions was worth over $6bn, meaning that Berkshire took a loss of around $2bn in four years on its investment in the leading air travel carriers. Buffet only makes a decision to sell at a loss if and only if he believes that the business’s profitability has been impaired for the long term, therefore it is conclusively unique for Buffet to sell his investments at a loss.
Since the beginning of the pandemic, Buffet had been taking different approaches to airlines. It was only in March that Berkshire acquired about 9,76,000 shares of Delta for about $45.3mn for an average cost of about $46.40 per share. As the outlook appeared to have become grimmer, Berkshire started selling his stakes in Delta and Southwest. At the beginning of April, Berkshire had sold off 2.3mn Southwest shares and 13mn shares of Delta. It netted about $314 million from the Delta share sales, plus another $74 million from the Southwest disposals, for a total of about $389 million. The news sent Delta’s stock down 11% and Southwest’s stock down 9% in after-hours trading.
The mighty impact of this selling came out to be that the stocks downgraded, reporting heavy losses for Q1. Since the airlines are receiving approx. $10bn each to remain operational through government aid, they may survive somehow for now. Due to this, it’s unlikely that the payback of this debt would be any time soon. It’s wise for long term investors to rather put the money elsewhere instead of sitting with the stocks for a few years expecting sustained moves upwards. This has even led to a steep rise in Berkshire’s cash pile taking it to the tally of $137bn approx. probably looking for an elephant size acquisition ahead.
When the world got hit by corona-virus, the aviation industry came trembling down with governments worldwide hammering restrictions on traveling. The only cause of the vast reach for the virus that could be understood to a layman was community spread resulting in reduced demand. Delta’s CEO Ed Bastian as part of a memo to employees said he expects the second quarter YoY revenue to fall by 90%. He went on to reveal the stark reality the company was facing, “Even as Delta is burning more than $60mn in cash every day, we know we still haven’t seen the bottom.” It’s not just Delta, but all airlines are facing the dust now with employees themselves seeking voluntary unpaid leave as a matter of their own safety. When Buffet stated that “the world had changed for airlines”, an honest breakdown of the statement stems from the fact that no one probably wants to go anywhere.
Going by the surging in the number of cases, the soured sentiment about traveling is surely going to last a while. It would take months to return to “normal” viz. over and above, time spent in lockdown.
– An Article By Shweta Sharma
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