Last week, Warren Buffet’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) made a sizable purchase to increase its stake in Delta Air Lines (NYSE: DAL)on a major down day and amidst unnerving turbulence in the markets. Last week will linger on in memory for a while as the harbinger of what is now undoubtedly the markets’ slide into bear-market territory, probably precipitated by the oil price collapse, triggered over the weekend by the OPEC-Russia impasse, and fueled on by the inexorable spread of COVID-19. We saw several alternating days in a row of big moves in the S&P 500 of plus or minus 4% or more, and we saw even bigger moves this week with the circuit breaker triggered after the S&P 500 breached 7% on Monday.
Prevailing wisdom posits that amid the kinds of selloffs we’ve seen recently and the pervasive risk-off sentiment among investors, the prudent investing approach is to, among other strategies, hang on to your dry powder and wait out the turbulence, or pile into safe-haven assets, and we’ve seen the latter play out in spades, with the historic flight to bonds forcing the entire US yield curve below 1% for the first time ever.
It doesn’t take a financial genius to know that this COVID-19 driven selloff will create immense opportunities to snap up numerous quality plays at bargain prices, but why expend your dry powder when the battle is still building up to a climax? Perhaps, because one has much dry power to expend, or because one figures that a quality play one’s been keen on is at a good enough price point for entry? One would imagine that the latter is the case here, although there are myriad other influencing factors.
As seen in the chart above, the Industrials sector in general, and especially the Airlines Industry, has been absolutely clobbered during this selloff. It’s seen a 26% plus YTD decline, and even more concerning is that we are yet to determine the full impact of the demand-side shock to the airline industry. The longer COVID-19 remains unfettered, without the appropriate policy responses, the more pronounced the severity of adverse impact to the industry will be.
Delta Air Lines (NYSE: DAL) closed significantly lower today than it did at any point last week, setting new 52-week lows this week, and very likely to set even lower 52-week lows in the coming weeks. Recent developments have seen the W.H.O. label COVID-19 as a pandemic, and with corporations initiating and heightening social distancing measures to stem the spread of the virus, one can’t help but respect the conviction it takes to make a very public purchase decision like that, even as one questions the soundness of the timing.
With that said, it doesn’t take much to see that while that entry point leaves something to be desired, it is not a losing entry.
Delta’s fundamentals are sound, making it preferable to most other airline plays when one can be bothered to make trading or investment moves in the Industrials sector, let alone the airlines industry. Delta Airlines is one of the better -run operators in the industry, and one would be hard pressed to see a scenario where Delta Airlines goes bust under any conditions. Suffice it to say that there are national security implications for the survival of airline operators, so you know that fiscal, liquidity policy machine will do its job.
If you ever have cause to doubt the wisdom of the Oracle’s moves, just look at his track record. It speaks for itself. Many readers will unabashedly admit that the first major market selloff event that they were old enough to understand (if one can actually claim to understand anything about the arcane dark arts of financial engineering that goes into structuring complex financial derivatives) was the 2008 financial crisis, and one easily recalls Buffet’s bold purchase of preferred stock of Goldman Sachs (NYSE: GS) at the height of the financial crisis. A genius move that helped shore up confidence in the bank at the time, and eventually made Buffet some pretty coin. With such visionary and bold investment moves, while under immense public scrutiny, one probably shouldn’t question the unfathomable depths of wisdom that underlie the Oracle’s investment decisions.
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