When Warren Buffett opens his mouth about investing, I listen. That’s why when United Airlines (NASDAQ:UAL) stock and the other major airline stocks took a nosedive due to novel coronavirus travel shutdowns, I bought shares.
At the time I was buying (March 23), I had no idea what Buffett was doing. But I knew Buffett loved airlines, and I remembered the things he’d said over the years.
So when Buffett revealed last weekend that he had sold his UAL stock and all other airline stocks, I was somewhat confused. I believe that decision to dump airlines in the middle of a crisis is short-sighted. I also believe Buffett opted to cash out major airline losses rather than taking advantage of a long-term buying opportunity.
Through the years, Buffett has repeatedly described the type of investing opportunities he looks for. I’d like to go through a couple of these and apply them to the current situation with UAL stock. One of his most famous quotes has to do with timing the market.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” Buffett wrote in a 1986 shareholder letter.
Is the market fearful about UAL stock? It’s down 74% year-to-date, so I’d say yes. Hell, even Warren Buffett is apparently fearful about it.
But while the “fearful” quote is one of Buffett’s most well-known, I prefer a different quote.
“The best thing that happens to us is when a great company gets into temporary trouble … We want to buy them when they’re on the operating table,” Buffett once said.
Is United Airlines a great company? That’s debatable. But I have one significant piece of evidence that it is. Warren Buffett, the greatest investor of all time, owned 9% of the company just a couple of months ago. So at least in Buffett’s opinion, United is a great company.
The next part of that Buffett quote hinges on whether or not United’s problems are “temporary trouble.” I’d argue that a global pandemic is the epitome of temporary trouble. United’s problems are not any fault of its own. Prior to the outbreak, United reported a record $3 billion in profits in 2019. One could argue that the company should have maintained a larger balance sheet cushion to handle a crisis. But I’d say they were relatively well-positioned to handle any other crisis that has ever occurred in U.S. history. No other recession ever triggered a 96% drop in air travel.
But while people argue about how the government is handling the pandemic, there seems to be only one sure thing. It won’t last forever. Either the country will eventually get mass immunity, or we will produce a vaccine. The airline business may not spring back to life by the end of 2020, but Buffett has never been one to care about one or two or eight quarters.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes,” he once said.
I find it hard to believe that in the year 2030, United Airlines investors will still be talking about the coronavirus.
Buffett specifically addressed airline stocks at the Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) shareholder meeting last weekend.
“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way,” he said.
I believe it will. I believe things will get back to normal for United the same way they got back to normal for Bank of America (NYSE:BAC) after Buffett invested in 2011. The same way things got back to normal for American Express (NYSE:AXP) after Buffett bought following the Salad Oil Scandal.
Bank of America is projecting airline revenues will be down 50% by the fourth quarter of 2020. However, in 2021, they are projecting that number will be just 17% lower than 2019 levels. I’m guessing by 2022, airline passengers won’t even think twice about the coronavirus.
I could use these same arguments to make bull cases for all airline stocks. But there’s a reason I chose United stock.
“UAL has been aggressively adapting its business since the COVID-19 outbreak began (with meaningful cuts to capacity and cash spending) and remains the most cautious of all the US carriers so far on a potential recovery (planning for the possibility of zero net passenger revenues for the remainder of 2020),” BofA analyst Andrew Didora recently told clients.
Like Buffett, I’m fearful of the near-term for the airlines, which is why I bought UAL stock, the most cautious of the group. But unlike Buffett, I’m also being greedy when others are fearful, just like he always said savvy investors should be.
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