Friday began on an upbeat note for the stock market, as investors put the summit between the U.S. and North Korea behind them and instead focused on the increasingly likely resolution of trade disputes with China as a positive catalyst. Around 11:15 a.m. EST, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 42 points to 25,958. The S&P 500 (SNPINDEX:^GSPC) picked up 8 points to 2,793, while the Nasdaq Composite (NASDAQINDEX:^IXIC) climbed 26 points to 7,558.
When it comes to individual stocks, broader market movements don't always matter that much. For Tesla (NASDAQ:TSLA), an announcement from CEO Elon Musk late Thursday didn't have the positive impact that shareholders had hoped for, but speculation surrounding whether Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett would look to buy Southwest Airlines (NYSE:LUV) drew new attention to Berkshire's cash stake and Buffett's interest in airlines.
Tesla goes mass market
Shares of Tesla dropped 8% Friday morning as shareholders reacted to the electric car company making several big strategic moves late Thursday. CEO Elon Musk said that the company would offer a scaled-down version of its Model 3 sedan with a price tag of just $35,000, making the vehicle affordable to a wider range of potential buyers.
Fans of the company had waited several years for Tesla to make good on its promise of delivering a true mass-market vehicle at an attractive price point. Yet buyers will have to accept some sacrifices, including a shorter range between charges and the need to pay up for some premium interior features.
Yet investors are also nervous about some other moves that Musk announced. Tesla will close most of its retail store network in favor of relying solely on online sales, in an effort to find ways to cut back on costs. Even with whatever savings it can gain from those closures, the company now expects that it won't make a profit in the first quarter, disappointing those who'd relied on previous guidance that pointed toward positive earnings.
Longer-term, the big question is whether the price cut implies falling demand for Tesla vehicles or simply the company following through on its past customer pledges. The answer will play a big role in determining whether the stock rebounds or keeps falling.
Is Southwest Buffett's elephant?
Also falling was Southwest Airlines, shares of which dropped 2%. The stock reversed part of a 4% gain Thursday based on rumors that Warren Buffett was looking at potentially taking over the airline entirely.
On one hand, the speculation makes sense, and the idea isn't particularly new. Berkshire Hathaway already has a nearly 10% stake in the Texas-based airline, and Buffett has made an about-face in his opinions about the airline industry more broadly. Berkshire counts several other airlines among its list of holdings in addition to Southwest. With almost $112 billion in cash and equivalents on Berkshire's balance sheet, the pressure to make a high-profile purchase has been mounting.
Yet Buffett's annual letter to Berkshire shareholders highlighted the fact that candidates for a full takeover are few and far between. With many stocks on the high side of Buffett's preferred valuation, the current environment just looks too expensive for the Berkshire CEO.
If Buffett were to consider buying a major airline, Southwest does look like the natural choice. The airline's business model best resembles what the Oracle of Omaha has looked for in past acquisitions, with a willingness to chart its own course rather than blindly following its competitors. Yet at least for now, hopes for a takeover seem premature, and those interested in Southwest should evaluate it based on its fundamental growth prospects rather than a potential buyout bid.