Was Warren Buffett Wrong to Sell Airlines?

Author: Gary Ashton

Estimated read time: 3 minutes

Publication date: 8th Jun 2020 11:32 GMT+1

In a Rose Garden speech on Friday, President Trump said famed investor Warren Buffett was wrong to sell airline stocks because they “went through the roof” after the Labor Department said US nonfarm payrolls grew by 2.51 million in May. According to the President, the country has turned the corner on the Coronavirus pandemic induced economic crisis. Buffett’s Berkshire Hathaway Inc. (NYSE: BRK.A) sold $6 billion worth of stock in American Airlines (NASDAQ: AAL), Delta Air Lines (NYSE: DAL), Southwest Airlines (NYSE: LUV) and United Airlines (NASDAQ: UAL) in April 2020.

There is no denying that airline stocks have taken a beating during the economic shutdown. Still, glimmers of hope that America is getting back to work following a government-induced closure has spurred investor optimism that the airline industry can recover. American Airlines’ stock closed with a gain of 77.1% for the week on Friday on record trading volume of 423.6 million shares. Where the stock goes from here remains uncertain. The stock ended Friday with what technical analysts call a “doji” price pattern on the daily chart, which signifies neither strong buying nor selling conviction. If the stock closes Monday above this pattern, then odds favor continued gains. A close below the doji pattern suggests the market may have gotten ahead of itself, and the stock will trade lower.

American Airlines seems to be the air carrier struggling the most from the weak macroeconomic situation. Finscreener.com’s analyst rating ranks American as a “moderate sell,” and its value ranking of 42.77 is lower than industry peers. In contrast, Delta, Southwest, and United are all ranked as “moderate buy,” but Delta has the highest value ranking at 63.83. Delta also trades cheaper than Southwest or United Airlines with a PE ratio of 4.7x compared to 9.4x and 7.6x, respectively.

Delta is quickly working to reduce costs but admits that it will have twice as many pilots as it needs come autumn. The airline has around 91,000 employees and is working on a plan to avoid laying off 2,300 pilots but admits that management needs to right-size the business to match staffing to summer 2021 flying.

Other airline stocks ended Friday’s trading session broadly lower, as did the more extensive airline exchange-traded fund US Global Jets ETF (AMEX: JETS) after putting in five sessions of trading gains. The JETS ETF tracks an index of companies involved in the air travel industry, including airline operators, manufacturers, airports, and terminal services. A competing, but more diversified ETF is the SPDR S&P Transportation ETF (AMEX: XTN). XTN’s performance this year has been better than JETS. XTN is down 11.05% in 2020 compared to the negative 36.93% return for JETS over the same period.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.