Last week, Berkshire Hathway (BRK.A, Financial) (BRK.B, Financial) made a shocking announcement through regulatory filings. Warren Buffett (Trades, Portfolio)'s conglomerate disclosed that it has started to offload some of its stakes in the airlines.
On Friday, the group revealed that it has now sold about 18% of its stake in Delta Air Lines Inc (DAL, Financial) and 4% of its holdings in Southwest Airlines Co ( LUV). Berkshire sold nearly 13 million Delta shares for about $314 million and roughly 2.3 million Southwest shares for about $74 million, according to the documents filed with the SEC.
Before these asset sales, the group had previously owned about 11.1% of Delta stock and 10.4% of Southwest stock. It had also been adding to its positions recently. Berkshire added around one million shares of Delta at the beginning of March.
Buffett has said before that three of Berkshire's airline stakes are managed by him, while his portfolio managers, Todd Combs and Ted Weschler, oversee the fourth.
A look at the airline sales
These sales are, in a word, fascinating. Only a few weeks ago, the Oracle of Omaha declared, "I won't be selling airline stocks," in an interview with Yahoo Finance editor-in-chief Andy Serwer.
He went on to add that while he's always "felt a pandemic would happen at some time," and that ultimately, the Covid-19 outbreak, "won't stop the progress of the country or the world."
We can tell that this is categorically not a play on the level of the market. We know Buffett does not do short-term market trading, so there's no point in even speculating that this is that.
From my view, there are only three reasons why the Oracle of Omaha would have decided to offload some of his airline stocks recently, based on the information that is publicly available as of the writing of this article.
The first reason is that he has decided he has made a mistake. In my view, this is very likely. I doubt that even in his wildest dreams Buffett would have predicted a total shutdown of the airline industry and a 90% decline in revenue. What's more, when he made the comments above at the beginning of March, it was not clear how bad the pandemic would become.
It's impossible to value a business that has almost zero revenue. As such, it could be argued that owning airlines right now is tantamount to gambling. Buffett might have decided to cut his losses, as he has done numerous times in the past, rather than waiting for something positive to happen.
Another possible explanation could be that he has just found something better to own. Over the past few weeks, market valuations have plunged, which has thrown up some fantastic bargains.
At the end of 2019, Berkshire had over $120 billion in cash on the balance sheet. I'm willing to bet that Buffett has deployed a large chunk of this over the past few weeks. He could be selling his extensive airline holdings to free up cash for other opportunities.
The third reason I see why Buffett could be selling his airline holdings is regulatory. Buffett has said in the past that he does not want to buy a whole airline as his ownership of financials, such as American Express (AXP, Financial), would cause some conflict of interest issues. If he's evaluating or in the process of making a significant acquisition that would result in potential conflicts of interest right now, that might cause him to sell and take the loss.
The bottom line
Buffett could be selling the airlines for any of the reasons above. However, at this stage, I still think it is silly to try and come to any conclusions on why the Oracle of Omaha has decided to take this course of action. Until he weighs in on the decision himself, we are not going to have a comprehensive answer.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett on Estimating Discount and Growth Rates
- Seth Klarman on Rational Thinking in Times of Market Stress
- Seth Klarman: The Risk of Buying Too Early
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