For value investors like Buffett, it is ideal to buy stocks when they are wrongfully beaten. In reality, you often have to buy on bad news. It’s not very often that you’ll see a drop in a company’s stock price for no reason. So get a reduced price, you often have to buy when things are difficult.
At the start of the stock market crash, it seemed logical. Now, however, the situation is a little different. With the escalation of the pandemic, there is a real possibility that airlines will lose money for an extended period of time. With this information revealed, Buffett made a surprising decision. And this is not good news for Air Canada (TSX: AC) (TSX: AC.B) shareholders.
Buffett reversed course on airline stocks
April 3, Berkshire hathaway has filed with the SEC disclosing its March transactions. One of the most significant was the massive sale of Delta Airlines shares. Buffett sold about $ 314 million, overshadowing the $ 45 million he bought in February.
This decision was not necessarily a bearish signal for Delta. Buffett still owns 9% of the company – a stake worth billions. However, this may indicate that he is less enthusiastic about the company than he was a month ago.
So far, Buffett has not commented on why he lost $ 314 million in DAL shares. However, we can reasonably deduce some possible reasons why it reversed the course.
First, with the escalation of the COVID-19 pandemic, it seems that air travel will decline for some time. When Buffett originally purchased DAL, the forecast for the severity of the pandemic was much milder. Now it looks like it will last a long time. If so, passenger flights could be grounded for the entire summer, or longer. This will hit the airlines in the portfolio.
Second, there is always the possibility of going bankrupt. Airlines are capital intensive businesses that need a lot of money to stay afloat. If flights remain frozen for a long time, many airlines may run out of capital and be unable to pay their creditors. If this happens, bankruptcy is a real possibility.
Why this is bad news for AC
The reason the Buffett move is bad news for Air Canada is that the company is largely in the same boat as Delta. Primarily a passenger airline, it depends on the people who travel to earn money. With flights nailed to the ground, it doesn’t do much.
On top of that, AC has a large debt with huge interest charges that it cannot pay back long without the income to come. If the passenger journey is interrupted, she could consider another bankruptcy.
Finally, Air Canada even has a Delta liability does not have, like a fleet of 737 Max 8 which will probably be immobilized even after the end of the COVID-19 crisis. For this and other reasons, buying Air Canada at a lower price right now is a very risky decision.
Crazy contributor Andrew Button has no position in any of the titles mentioned. The Motley Fool owns shares and recommends Berkshire Hathaway (B shares) and Delta Air Lines and recommends the following options: long January 2021 $ 200 on Berkshire Hathaway (B shares), short January 2021 $ 200 on Berkshire Hathaway (B shares), and runs June 2020 $ 205 calls on Berkshire Hathaway (B shares).