Retailing is out, airlines are in, and as we learned last week, Warren Buffett is staying with banks – specifically Wells Fargo.
Berkshire Hathaway’s third quarter filing of its investment activities showed it had cut its stake in Wal-Mart Stores Inc. by 68% in the third quarter, but had made investments in four of America’s major airline groups in a big change in long held strategy.
The filing showed that Berkshire said it has bought shares in U.S. airlines: American Airlines Group Inc, Delta Air Lines Inc, Southwest Airlines Co and United Continental Holdings – the four are the biggest US carriers.
What made the move standout (besides the fact that it was made by Berkshire) is that it is a huge change of investment policy because of a loss making smaller investment in the old US Air Group (which was a forerunner to the present day American), nearly 20 years ago.
According to the filing with the US Securities and Exchange Commission, Berkshire as of September 30 owned 21.8 million American shares worth $US797 million, 6.3 million Delta shares worth $US249.3 million, and 4.5 million United shares worth $US237.8 million.
Buffett later told CNBC television that Berkshire later invested in Southwest, and was disclosing that stake to avoid misleading investors into believing he was avoiding the carrier. The size of that stake was not revealed.
US analysts also point out that the four purchases expand Berkshire’s bet on the US economy, and in particular transportation. Berkshire already owns the BNSF railroad and the NetJets luxury plane unit, and in January paid $US32.1 billion for aircraft parts maker Precision Castparts. It also owns training company FlightSafety International Inc.
In after-hours trading, American shares rose 3.8%, Delta 3.4%, Southwest 3.3% and United 2.2%.
The four airlines posted a record $US21.7 billion combined profit in 2015, and command more than two-thirds of the domestic market. But there have been signs this year that the benefits of the plunge in fuel prices is wearing off.
Berkshire first moved into airlines in 1989 when Buffett bought $US358 million of USAir preferred stock, but he quickly came to regret that purchase, even though Berkshire made a tidy profit on the stake.
In 1997, he told Berkshire shareholders he had misjudged how US Air would “increasingly feel the effects of an unregulated, fiercely-competitive market whereas its cost structure was a holdover from the days when regulation protected profits."
Eleven years later, Buffett felt no better, calling airlines a capital-intensive business that earned little or no money.
“A durable competitive advantage has proven elusive ever since the days of the Wright Brothers," he wrote in his February 2008 shareholder letter. “Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."
And at Berkshire’s annual meeting in 2013, Mr Buffett said the airline industry was a “death trap”, saying: “Investors have poured their money into airlines for 100 years with terrible results.” At the end of the quarter, Berkshire had cut its stake in Wal-Mart to 13 million shares worth less than $US1 billion, down from nearly $US3 billion in the middle of this year.
While Walmart stock is up 15% so far in 2016, it has recently begun to falter and the shares dipped slightly during the third quarter when Buffett reduced his stake. The shares have stock fallen nearly 5% in the last three months.
Berkshire Hathaway shares are up 19.8% so far in 2016, reaching 52-week highs this week driven by a Trump-inspired rally in financials. An A-share of the company traded around $US236,650 on Monday.
