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May 27, 2020, 8:30 a.m. EDT

Here’s why Warren Buffett made a huge mistake selling his airline stocks 

Industry insiders at these airlines are buying up shares of their companies

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By Michael Brush, MarketWatch


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There’s a big debate now about whether Warren Buffett has “lost his touch.” I’m not sure, but here’s one group of people that has little doubt: airline sector insiders.

While Buffett’s Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +1.41%   /zigman2/quotes/200060694/composite BRK.B +0.90%  booked substantial losses dumping airlines stocks in the late first-quarter weakness in the sector, insiders at close to half a dozen airlines bought lots of their stock — including the airlines Berkshire sold.

Read: Warren Buffett has lost at least $7 billion from his last 3 big investments

In a direct challenge to the Oracle of Omaha, insiders racked up the kind of sector-wide buying I look for to support a bullish industry call in my stock newsletter Brush Up on Stocks .

Money managers invested in airline stocks say that three key factors explain airline insider bullishness:

1. Government to the rescue: Politicians see the airline sector as a cornerstone of U.S. economic security. Moreover, airlines and related businesses employ a lot of people. So the federal government readily approved $50 billion in support. 

One in 15 jobs is airline-related if you include hospitality, says Frank Holmes, CEO of U.S. Global Investors, which manages the U.S. Global Jets /zigman2/quotes/207744796/composite JETS 0.00%   exchange-traded fund. “There is big multiplier effect in the airline industry. That is why politicians supported the package.”

2. Travel is coming back: The number of airline passengers screened per day has risen to around 200,000 from lows of 87,000 in mid-April. This offers “flickers of hope” for the group, says Raymond James airline analyst Savanthi Syth. While still low, travel statistics are heading in the right direction, Syth says.

As travel picks up, the benefits of airline sector consolidation will kick in again, adds Samantha McLemore, a portfolio manager at Miller Opportunity Trust Fund /zigman2/quotes/200973551/realtime LMNOX +1.83%  . Airlines have inherently higher return on capital and cash flows because of improved cost controls and pricing power. Airlines also have been able to raise capital during this crisis so they will be able to “fund their way through this” as traffic improves, she says. 

3. Airline stocks did well after the last three financial crises: In the six months after the 9/11 terrorist attacks, the 2003 SARS outbreak, and the 2008-09 financial crisis, airline stocks rose 80%-120%, Holmes points out. Insiders buying now are hoping the past will repeat. 

All of this raises the question, Why did Buffett sell? Only he knows for sure. But money managers say he disliked the group ever since he lost a lot of money in it because of an airline bankruptcy years ago. He was probably easily scared out of it, given the history. “With all the unknowns, it was easier for him to go back to his original position,” says Craig Hodges, who follows airline stocks for Hodges Capital Management.

Here’s a look seven airline stocks including the ones Buffett sold and those seeing insider buying: 

Delta Airlines

While Buffett sold this Delta Airlines /zigman2/quotes/200327741/composite DAL +1.51%  in the first quarter, insiders bought $640,000 worth of at $22 to $22.70 per share in late April and early May. This included an “in your face” purchase of $66,000 by one insider the day after Berkshire Hathaway’s annual shareholders’ meeting where Buffett dissed airlines.

To get through the pandemic crisis, Delta has cut operating expenses in half. “For a company with a huge fixed cost base that is really impressive,” says McLemore of the Opportunity Trust fund, which owns Delta shares. “Delta can get close to cash-flow break-even if demand goes up enough so that it is down 50%,” she says. Traffic for the group is off around 90%, now. “Delta is in a good position to survive and make it through to the other side,” she adds.

/zigman2/quotes/208872451/composite
US : U.S.: NYSE
$ 277,774
+3,874 +1.41%
Volume: 382.00
July 13, 2020 2:56p
P/E Ratio
46.43
Dividend Yield
N/A
Market Cap
$444.14 billion
Rev. per Employee
$637,113
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/zigman2/quotes/200060694/composite
US : U.S.: NYSE
$ 184.56
+1.66 +0.90%
Volume: 5.23M
July 13, 2020 3:15p
P/E Ratio
46.32
Dividend Yield
N/A
Market Cap
$444.14 billion
Rev. per Employee
$637,113
loading...
/zigman2/quotes/207744796/composite
US : U.S.: NYSE Arca
$ 16.18
0.00 0.00%
Volume: 2.98M
July 13, 2020 3:15p
loading...
/zigman2/quotes/200973551/realtime
US : U.S.: Nasdaq
$ 30.12
+0.54 +1.83%
Volume: 0.00
July 10, 2020
loading...
/zigman2/quotes/200327741/composite
US : U.S.: NYSE
$ 27.50
+0.41 +1.51%
Volume: 25.85M
July 13, 2020 3:15p
P/E Ratio
5.08
Dividend Yield
0.00%
Market Cap
$17.28 billion
Rev. per Employee
$499,337
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