Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has gone from buyer to seller on airline stocks, selling nearly 13 million shares of Delta Air Lines (NYSE:DAL) and 2.3 million shares of Southwest Airlines (NYSE:LUV) in recent days.
Airline stocks have been among the hardest hit by the COVID-19 coronavirus pandemic-related sell-off, with shares of Delta and Southwest down 52% and 36%, respectively, in the last month alone. But the sale by Warren Buffett's Berkshire is still surprising, considering the company was buying Delta shares just one month ago.
Berkshire Hathaway had to disclose the sales because it owned more than 10% of each airline. We won't know until May whether Berkshire was also selling its stake in two other airlines, United Airlines Holdings (NYSE:UAL) or American Airlines Group (NASDAQ:AAL), or whether Buffett and his co-advisors intend to continue to pare their Delta and Southwest stakes in the days and weeks to come.
It’s worth stating, we don't know for sure it was Buffett who pulled the trigger: He has said that he oversees three of Berkshire Hathaway's airline positions, while portfolio managers Todd Combs and Ted Weschler are responsible for the fourth.
Truth is there is a lot we don't know about the sales, other than to say the moves are not bullish for the airlines. And they could signal how the Oracle of Omaha is thinking about the overall market as well.
Airlines and the economy are in turmoil
The airlines are high-fixed cost businesses that have seen revenue evaporate overnight. Delta on Friday said it is currently burning through more than $400 million of its cash reserve each week and expects second quarter revenue to fall 90% year over year. Southwest, meanwhile, reportedly flew more than 50 empty planes on a single day last week.
The airlines are turning to the government for help, with both Delta and Southwest -- along with most of their peers -- expected to apply for some of the $50 billion in grants and loans available to the industry as part of the $2 trillion economic stimulus package passed late last month. But that money only buys more time: No airline can burn through $1.6 billion in cash per month and sustain operations indefinitely.
The hope is that as the pandemic is eventually contained passenger traffic will come back, but that's no sure bet if the economy falls into a recession. With each passing week, and with jobless claims reaching record highs, a recession seems more and more certain. And the airline industry's future gets less and less clear.
Berkshire Hathaway's sale if nothing else could be interpreted as a sign that the brain trust in Omaha are worried we are headed into a severe downturn. If you believe there is a real chance of a quick rebound these airlines are significantly undervalued -- Delta for example is trading at 3 times trailing earnings and 0.3 times sales -- and now is the worst possible time to sell. It seems clear that Berkshire is assuming that won't be the case.
What was Warren thinking?
Airline are in trouble. Still, selling after a sharp decline seems out of character for an investor who famously said, "be greedy when others are fearful." Buffett is only a recent convert to the airlines after years of criticizing the industry, and it could be that this experience is giving him second thoughts about believing things have changed.
Still, the sales we know about hardly indicate he is raising the white flag. Berkshire Hathaway even after the sales still own more than 9% of both Delta and Southwest, and still might own shares of American and United as well.
It is possible this could all be housekeeping: Buffett typically doesn't like Berkshire's equity stakes to go above 10% of a company but said in 2017 that he made an exception on Delta. These sales could simply indicate that he no longer feels airlines deserve an exception to his rule. Or Buffett could be looking for ways to add a little ammunition ahead of firing fire his so-called "elephant gun," although the airline share sales added just $350 million to Berkshire Hathaway's $120 billion cash stockpile.
At the risk of trying to read Warren Buffett's mind, I don't think these sales signal his exit from the airlines. The stocks are sure to fall further on this news (and indeed shares of both Southwest and Delta plunged in after hour trading Friday night). If Berkshire was planning to sell significantly more shares in the near future, it makes no sense to wait until after this filing to do so.
Caution is the key
Investing in an airline today feels like a binary option: If the companies survive, the stocks as noted above are almost certainly undervalued. But there is a risk the economy doesn't recover in time and all the stocks are going to zero.
Delta and Southwest, the two airlines we know Berkshire was selling, are the best run and have two of the strongest balance sheets in the industry. Bailing on those two in particular doesn't speak well for Berkshire Hathaway's overall view of the industry or the economy.
But it is worth noting that, as far as we know, Berkshire Hathaway still holds airline stocks as a small part of a well-diversified portfolio. And despite the uncertainty, I still believe the odds are good that these airlines will find a way to stay solvent until traffic returns. I can't blame Berkshire or any other investor for keeping only a small stake in the industry, but I'm holding onto my Delta shares and would recommend that stock for anyone who is intrigued by the airlines.
Warren Buffett's initial turnaround from airline avoider to investor was hailed as a fresh start for the industry, and this latest U-turn is certainly a setback. But this journey isn't over yet.