Market gyrations are giving investors an opportunity to perform portfolio makeovers, and I've been doing some pruning and planing myself. Earlier this week, I sold a couple of stocks but initiated two positions, as well.
I sold my entire position in American Airlines Group (AAL 1.11%) and American Express (AXP -0.03%), but I can assure you that I'm not anti-American. I also bought into Cisco Systems (CSCO 0.39%) and Southwest Airlines (LUV 0.58%).
Why did I replace one airline for another? Why did I realize that -- when it comes to American Express stock -- that I should leave home without it? Did I pick up my shares of Cisco in a 1999 time capsule?
Let me go over all four of these portfolio moves.
Warren Buffett is pretty disciplined and methodical when it comes to his investments, so when he revealed this past weekend that he had sold his sizable stakes in all four of his airline stocks -- including American Airlines and Southwest -- it was easy to see why the sector took a hit. This has been a brutal year for the industry, given air-travel restrictions in light of the COVID-19 crisis, and Buffett apparently had enough.
I had bought into American Airlines early in the pandemic, and it's on me for getting bloodied trying to catch a falling knife. I knew I was buying a leveraged player in a slumping industry. I decided to follow Buffett on the way out of American, but I also saw this as an opportunity to pick up some of the Southwest shares he was discarding.
Southwest isn't perfect. Even when the going was good -- as it had been in an expanding economy -- gross margin contracted in each of the past four years. Revenue has grown in the low-single digits in that time, clocking in with a mere 2% advance in 2019.
Things will only get worse here, but Southwest has the strongest balance sheet in the industry. It's a market and customer darling. I also think there'll be a shakeout at the other end of this crisis.
I'm not sure if American will have the financial fortitude to see things through, but I'm fairly confident that Southwest would be the last one standing if things continue to deteriorate. I essentially swapped out one speculative airline for a less speculative one. I will never consider myself to be an expert in the airline industry, but I feel more confident holding a best-in-class player in these turbulent times.
Charging out of Amex
I don't usually let a single bad earnings report scare me out of a position, but there was a lot not to like in American Express' latest quarter. The financial-services giant posted a rare year-over-year decline in revenue after guiding to a small increase in its March update. Reported earnings took a beating, as American Express loaded up on credit-reserve builds as it braces for hard times.
Healthy credit card swiping activity in January and February understandably dried up near the end of the quarter. With unemployment rates spiking, it's easy to see why credit risks are bubbling up to the surface. However, what really scares me here is what's happening right now.
American Express has a ton of credit and charge card options for consumers, but the ones that command the highest annual fees are the ones that cater to travelers. Airline credits, free hotel-chain status, and in some cases complimentary stays are perks of the top American Express cards.
The company's customers aren't happy holding those high-fee cards in this climate with perks they can't use, so American Express is mixing things up. It's shifting the credits to wireless carriers, streaming services, groceries, and restaurant take-out for the balance of 2020.
The new perks are more likely to be used by customers, and that may help with retention. However, that's also probably going to cost American Express more in the process.
Cisco at the disco
I may be two decades too late to the dot-com bubble party, but now that Cisco is a slow-yet-steady player, there's a lot more to like than there was in the sudsy days of yore when demand for its routers and switches was booming. Cisco is still able to carve out a cozy living getting companies and consumers up to speed on their networking gear. No matter how this pandemic shakes out, we're going to need to improve our overall connectivity levels.
You have to go back to 2010 to find the last year in which Cisco posted double-digit revenue growth, but it has come through with reliable single-digit top-line gains in four of the past five fiscal years. There's also a juicy 3.4% yield for patient income investors, and Cisco is good for the payouts with its forward earnings multiple in the low teens.
All four of the stocks I traded this week aren't perfect. None of them will be on your list of top growth stocks. However, I think I'm taking advantage of falling airline stocks to snag an upgrade in a switch to Southwest. I'll probably be back into American Express once the coast is clear, but for now, I feel that Cisco is a safer play with a higher dividend.