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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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Delta is the most profitable and reliable of the three legacy U.S. airlines, and this gives it an advantage, says Cowen airline analyst Helane Becker. She has an outperform rating and a $33 price target on the stock. Stifel analyst Joseph DeNardi has $45 target price, as does J.P. Morgan analyst Jamie Baker.

SkyWest Airlines

Insiders were also big buyers at SkyWest Airlines /zigman2/quotes/205631497/composite SKYW +2.18%  , which Berkshire dumped in the first quarter. In mid-March, insiders bought $1.67 million worth of stock at $25.50 -$37.90 per share. The stock is still trading in that range, but the buying reverses three years of nothing but selling by insiders.

SkyWest is the largest U.S. regional aircraft operator. It stands out in a wobbly group for its solid balance sheet. “The company has ample liquidity to sustain the downturn in travel demand,” says Becker at Cowen, who has an outperform rating on the stock and a $35 price target. “Darwinism is at play, and SkyWest is the fittest,” is how Stifel’s DeNardi sums it up. He has a $35 price target. 

Alaska Air Group

There’s only a small amount of insider buying at Alaska Air Group /zigman2/quotes/200972303/composite ALK +1.28%  , just $10,000 worth on March 23 at $23.68. That was a good call because the stock is already at $31. Though small, the purchase reverses nothing but insider selling over the past four years and supports the group-wide buying I look for to make sector calls.

Stifel analyst DeNardi says Alaska Air Group is one of the sector’s strongest companies. Liquidity is not a huge issue since the airline has enough cash to survive for about a year, and it can borrow against aircraft, real estate and airport slots.  He has a $44 price target. Becker, at Cowen, has a $39 price target.

Southwest Airlines

No insider buying here, but Hodges at Hodges Capital management owns Southwest /zigman2/quotes/201071949/composite LUV -0.03%  shares in part because of the company’s balance sheet strength. He says Southwest has enough liquidity to last 19 months even with no recovery in demand.

Southwest is mostly a domestic carrier, which helps, too. “International travel is really going to be a challenge,” Hodges predicts. He also thinks business travel will be reduced for years. This favors Southwest because it relies less on business travel. Cowen has a $40 share-price target. 

JetBlue Airways

Insider buying at JetBlue Airways /zigman2/quotes/207639051/composite JBLU +2.72%  of just $4,000 worth at $8.37 a share in April reverses February-March selling at $15 to $20. This is a bullish reversal signal, another criteria I look for in insider analysis. While small in size, it supports the group-wide buy signal in the sector.

United Airlines Holdings

Buffett also sold United Airlines /zigman2/quotes/205037281/composite UAL +2.07%  , and so far insiders aren’t taking the other side of that trade. McLemore owns this stock in the Opportunity Trust fund. She says United has the financial strength to survive. Baker at J.P. Morgan has a $45 price target.

American Airlines Group

To be sure, insiders are not always right — at least not right away. They bought $1.1 million worth of American Airlines /zigman2/quotes/209207041/composite AAL +4.20%  stock at $19-$25 in late February and the stock recently traded at $9.70 a share. The decline is partly due to Buffett being a big seller. 

American also looks like the riskiest investment because of its weak balance sheet. The airline is saddled with $38.5 billion in debt, according to Raymond James. “If demand does not come back, American is in trouble,” Hodges says. That said, bankruptcy-risk companies also offer the most upside, if those risks diminish.  

Goldman Sachs airline sector analyst Catie O’Brien says the bullish case for American Airlines is viable, citing rising demand for flights to Florida, and hefty cost cutting. She notes American has $10 billion in assets to borrow against, not counting its loyalty program. She has a $13-per-share price target. Becker at Cowen is also bullish, with a $15 price target.

To be sure, airlines are risky, despite the insider buying. Boeing /zigman2/quotes/208579720/composite BA +1.91%   CEO David Calhoun recently rankled the sector by predicting that a major U.S. airline will go bankrupt. Harvard epidemiologist Michael Mina cautions there is a “real danger” we will see major COVID-19 outbreaks this fall after a summer of relaxed lockdowns. That would surely put airline stocks in a tailspin again. 

At the time of publication, Michael Brush had no positions in any of the stocks mentioned in this column. Brush has suggested INTC, TXN, QCOM, CTSH and ADI in his stock newsletter Brush Up on Stocks. Brush is a New York City-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School. Follow Brush on Twitter: @mbrushstocks.

More: Dud stock picks, bad industry bets, vast underperformance — it’s the end of the Warren Buffett era

Plus: Forget bonds — here are 5 safe tech stocks offering dividends and growth

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0.00%
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N/A
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N/A
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P/E Ratio
N/A
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Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. Brush has covered business for the New York Times and The Economist group. He attended Columbia Business School in the Knight-Bagehot program.

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