Should You Follow Buffett and Bet on the Aviation Sector?

JetBlue represents a great opportunity for investors

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Nov 23, 2016
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Airline stocks have rallied hard over the last few days primarily because Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) bought stakes in several of the legacy carriers. Buffett has not invested in the aviation industry since the '90s, and his stance on the aviation industry has usually been bearish. It is no surprise that the stocks are rallying after the Oracle of Omaha made a big bet on the industry.

While Buffett has only bought stakes in the legacy carriers, investors can benefit better from smaller companies in the sector that are growing at a good clip. JetBlue (JBLU, Financial) is the best pick for investors looking to follow Berkshire Hathaway into the aviation industry.

Why didn’t Buffett buy JetBlue?

The first question that probably comes to investors’ minds is that if JetBlue is the best pick in the aviation industry, why didn’t Buffett buy a stake in it?

Well, the answer to that is simple. Whenever Berkshire Hathaway invests in a company, it usually acquires a big stake spending billions in the process. Given that JetBlue’s current market cap is just a little over $6 billion, it would have been impossible to buy a big stake without influencing the company's share price.

Investing billions in JetBlue would have pushed the stock price a lot higher, thereby damaging the margin of safety for Berkshire Hathaway. Margin of safety must be a really important factor for Buffett given that he is a disciple of Benjamin Graham. And this is the reason why I think he didn’t invest in smaller carriers like JetBlue.

Investors should capitalize

By buying stakes in several legacy carriers, Buffett is indicating that he is bullish on the industry on the whole. JetBlue would be a much better buy for retail investors as the carrier has a lot of room to grow. In addition, JetBlue has always been the leader when it comes to innovations in the aviation industry.

The combination of JetBlue’s innovations and growth should propel the stock to higher levels in the future, and this makes the stock a better buy than other legacy carriers.

Final words

After the strong recent rally in the aviation sector, JetBlue is the best buy. The carrier has a lot of room to grow and a healthy balance sheet as well. The company has successfully benefited from cheap crude by expanding its services and I expect it to continue doing the same.

Disclosure: No position.

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