Monday, May 4, 2020

Analyzing Why Warren Buffett Dumped Airline Stocks

We learned over the weekend that Warren Buffett dumped the remaining stake of his airline stocks.  Were you surprised?  If you were, then you weren't interpreting the signs correctly.  Buffett let his hand be known in early April when he sold 13 million shares of Delta (DAL) and 2.3 million shares of Southwest (LUV).  I'm not playing Monday QB here.  He sold just enough of his shares to get under the 10% holding amounts and not have to publicly report any more of his sales per SEC regulations.  If you are new to stock market investing, you might be wondering: Why not sell all of his stake at once?

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Selling so many shares at once would've created a flash crash in the stock price, resulting in even more losses for Berkshire Hathaway.  Once below the 10% threshold, Buffett and his team could better execute an exit strategy for the remaining shares, selling in blocks of millions of shares during intraday highs on any given trading day, for example.  For fans of the Oracle of Omaha, as Buffett is known, the sale of his entire airline position was a bit of a bummer, causing all sorts of arguments online.

I myself questioned Buffett's decision.  I wondered at first if he had lost his mojo.  I mean, in the context of other mistakes (IBM, and Kraft Heinz), selling Delta and Southwest seemed more emotional in nature.  As if, dare I say, Buffett had allowed fear and panic cloud his traditionally stoic judgement.  I might be going too far here.  Who knows if Buffett let his emotions get the best of him?  He's got a team to work with and it's assumed a consensus was reached before pulling the plug.

So let's now analyze the trade(s).  In selling all of their airline holdings, Berkshire and Buffett are essentially telling us that they priced in far too much risk to the downside for the airlines, and not enough risk to the upside to justify a HOLD.  In other words, the odds of losing more money (according to their modeling scenarios) far outweighed the odds of recuperating money already lost, albeit, unrealized.  I wish I were a fly on the wall during their meetings to see how much more downside, worst case scenario, their models predicted.  What...another 10%, 20%?  The airlines going bankrupt?

Now, let's look at Berkshire's latest airline buy order.  On Feb. 27 of this year, Berkshire bought 976K shares of Delta, or about $45.3 million dollars' worth, at an average per-share price of $46.40.  This put the company's total holding at 71.9 million DAL shares, an 11.2% stake in the company at the time.  Mind you, this was at a time when the share price had fallen, meaning that Berkshire's cost-basis was obviously higher than $46.40.  Last week, DAL traded in the mid-twenties, reaching a high of $27 and change.  So, assuming Berkshire's cost-basis on DAL alone to be near $50 or even higher, Buffett would've needed a 100% rally in the price of the stock just to break even!

Buffett clearly doesn't believe that's going to happen any time soon.  Maybe not even in his lifetime!  He chose to cut his losses, stash whatever cash he had left in those trades, and live to fight another day.  Yes, the short-term capital losses will hurt, and indeed they sank Berkshire to one of the worst Q1 financial losses of any S n P company in history (-$41.9 billion...ouch!).  Stock holders have nothing to fear, however.  Berkshire has plenty of cash on hand, and they will figure out how to deploy it soon enough.  We might just see one last big move by Buffett, pulling another rabbit out of a hat like he's done so many times.

Thanks for reading!            

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