Berkshire Hathaway boss Warren Buffett threw all shares of airlines out of the portfolio of his investment holding company in the past months. A mistake, many believe, and deny him his skills as a value investor – without justification?
No more airline shares in the Berkshire depot
- Bad decision or right nose? Airlines in the dump
- Buffett has said goodbye to airlines before
Warren Buffett’s value investment strategy has maintained his reputation as a celebrated stock market legend for decades. For some time now, criticism has been mounting against this otherwise highly respected investor legend: He is too old, unable to make decisions or does not keep up with the times, according to various skeptics. But the expulsion of all airline shares from the portfolio of his investment company Berkshire Hathaway during the Corona crisis tore a pillar in the foundation of the Omaha oracle and is now adding to the already crumbling facade. But does the possible wrong decision on the airline investment really deprive Buffett of his status as a value investor?
Airline share price plummets during Corona stock market crash
Not so long ago, the Berkshire Hathaway depot still contained shares of American Airlines, United Airlines, Delta Airlines and Southwest Airlines. However, like all other industries, these airlines were hit hard by the measures taken against the pandemic. In the wake of the corona-induced crash on the stock markets, the prices of these companies also plummeted. Since the beginning of the year, the stocks have each been down between 60 and 80 percent. Warren Buffett made short work during these price movements, after initially only reducing positions, and threw all airline shares out of the Berkshire Hathaway portfolio.
This prompted numerous critics – including US President Donald Trump, who called this decision a “mistake”. Kenneth Fisher, CEO of Fisher Investments, and day trader Dave Portnoy also belong to the ranks of those who consider the glorious days of the stock market legend to be numbered. By rejecting the airline shares, he had gone against the philosophy of his conglomerate – Berkshire’s portfolio would normally have recorded acquisitions in times of crisis. But in this crash, Buffett kept his feet still and continued to sit on the mountain of cash worth billions.
Is Buffett no longer living up to his own strategy?
Warren Buffett is known for being a gifted value investor. The almost 90-year-old therefore showed a skilful hand at identifying undervalued companies, investing early and profiting from their sometimes exorbitant developments. This made him a celebrated star of the stock market – many stock market players have oriented themselves to his investment decisions over the years.
However, the latest accusations about the alleged wrong decision now came to light, because after their lows, stocks initially rose again significantly. However, they were unable to keep up with the recovery of other stocks for a long time – all the stocks thrown out have still been down between 38 and 63 percent since the turn of the year (on the basis of the closing price on July 7).
Vitaliy Katsenelson, columnist at MarketWatch and CIO of Investment Management Associates in Denver, is therefore more sympathetic to the decision of the stock market legend. The 89-year-old had already decided on a similar course of action in the 1980s: He invested in the aviation industry, but lost a large sum of money in the process and initially held back with corresponding purchases in this sector. But after the great financial crisis, competition seemed more rational after all the mergers, takeovers and fluctuation – which prompted Buffett to focus on airlines again as part of his value strategy. And so he invested in the four largest airlines.
Unprecedented burden for airlines – before the end of the day?
For airlines, aircraft utilization in particular is always in focus. According to Katsenelson, in the worst case – for example, in the event of a recession – a downtime of 50 to 60 percent of the aircraft has been calculated in advance. Normally, in such scenarios, fewer people can simply afford a ticket and thus less revenue is generated. But what came with the Corona pandemic exceeded everything that even pessimistic investors imagined: Airlines were forced to leave about 95 percent of their planes on the ground in the spring of 2020. And not because a wave of poverty hit the world’s population, but because of the highly infectious lung disease that forced governments to take unprecedented measures.
“Sad reality” – airline facing bankruptcy?
In his column on MarketWatch, the Investment Management Associates CIO says that “the sad reality” is that airlines need new capital after this fatal event in order not to go bankrupt. However, this measure will, in turn, reduce the value of the companies and will depend in particular on how long the pandemic phase lasts.
If debts have to be taken out, the fixed costs will increase. These are already the main cost drivers for airlines. For example, the use of oil is subject to uncertain conditions – from price development to availability. In addition, Katsenelson points out that against this backdrop, profitability is decreasing – these future earnings would then have to be distributed among even more shareholders. “The longer the fear of the coronavirus persists, the more money these companies will lose and the greater the damage that will be done to their balance sheets and thus their future profitability,” he writes. Nobody knows how long it will take before normality returns and when airlines will return passenger numbers to pre-crisis levels.
Whether or not Buffett will live up to his value strategy precisely because of this alleged mistaken decision will ultimately remain a question of interpretation. What is clear, however, is that airlines are among those industries that are having a particularly hard time getting their revenues back to normal, making them an attractive investment for investors.
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