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Berkshire Buys Maligned Airlines: Classic Buffett Move

Classic Buffett Strategy: Berkshire Buys Maligned Airlines AAL, DAL, UAL, LUV

Warren Buffett’s Berkshire Hathaway Inc. recently filed its Q3 13F filing with the SEC, disclosing its long equity stakes as of September 30.

For years, the famed investor stayed away from airlines stocks and recommended value investors do the same. So, it came as a big surprise when his firm’s 13F revealed new positions in three of the four major airlines in the United States: Delta Air Lines, Inc. DAL 2.01%, United Continental Holdings Inc UAL 3.53% and American Airlines Group Inc AAL 2.29%. These stakes were respectively valued at roughly $249 million, $237 million, and $797 million by the end of the third quarter.

Furthermore, CNBC reported on Monday, Berkshire Hathaway initiated a new stake inSouthwest Airlines Co LUV 1.26% in October.

A Value Investment

Even more surprising was the timing of these picks, many analysts pointed out, citing peaking profit margins. However, other experts understood the moves as value investments — taking into account not only depressed valuations but also increasing cash flow generation capabilities and a commitment to returning cash to shareholders.

Airlines stocks tumbled in the first half of 2016 before rebounding around the summer. In fact, over the first six months of the year, the Dow Jones U.S. Airlines Index INDEXDJUSAR lost almost 24 percent. But, after bottoming in late-June, the index started to recuperate, and is now up almost 2 percent year-to-date.

AAL data by YCharts

As it can be appreciated in the chart above, the stocks Buffett purchased traded at depressed valuations in the third quarter and in October, only starting to really surge again in November.

Moreover, since the filing and CNBC report were out on Monday:

  • American Airlines has risen 3.5 percent.
  • Delta Air Lines has escalated 2.2 percent.
  • Southwest Airlines has spiked 4.3 percent.
  • United Continental has gained more than 8.25 percent.

Even in spite of the recent run-ups, three of these airlines stocks still trade below their industry’s average of 9.2 times P/E. Only Southwest trades at a premium, at 13.1 times TTM earnings.

Image Credit: Public Domain, via Wikimedia Commons

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