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Why Warren Buffett Ignored Doomsayers and Bought the Stock Market Dip

Last Updated September 23, 2020 1:37 PM
Mark Emem
Last Updated September 23, 2020 1:37 PM
  • Berkshire Hathaway increased its position in Delta by about 1.4%.
  • Wall Street analysts have been warning against buying amid the stock market rout.
  • Warren Buffett is not one to follow the herd.

The coronavirus disease outbreak has ravaged airline stocks in the wake of global flight cancellations. While everyone was scurrying for the exits, Warren Buffett was buying.

According to an SEC filing posted earlier this week, Berkshire Hathaway (NYSE:BRK.A) bought 976,507 shares  in Delta Airlines Inc. (NYSE:DAL) towards the end of February. At the time of the transaction, the stock was down nearly 30% from its 2020 high. Year-to-date, Delta Airlines has depreciated by a little over 20%.

Berkshire is currently the largest owner of Delta:

Berkshire Hathaway
Berkshire Hathaway is the largest owner of Delta Airlines | Source: CNN.com 

The purchase increased Berkshire’s stake in the airline by about 1.4%.

Warren Buffett disregards scaremongers

Warren Buffett’s move to increase his holdings in an industry ravaged by coronavirus disregards a flurry of warnings against buying the stock market dip.

Earlier this week, Allianz’s chief economic adviser Mohamed El-Erian urged long-term investors to avoid buying stocks  despite the attractive-looking prices as they could have further room to fall.

Late last week, Goldman Sachs called on investors  to resist the urge to buy the dip. The Wall Street giant argued coronavirus will cause earnings to fall significantly in 2020.

Warren Buffett
Source: Twitter 

Why Berkshire Hathaway added to its Delta Airlines position

So what made the “Oracle of Omaha” ignore the doomsayers? There are at least three reasons.

1. Delta Airlines is a bargain

Berkshire Hathaway currently holds nearly $130 billion in cash. Buffett has lamented on several occasions that it’s hard to find attractive purchases. Well, last week’s market rout just handed him an opportunity that he couldn’t pass up.

As a value investor, Buffett is always on the lookout for bargains and at current prices, Delta Airlines is attractive. While the average price-to-earnings ratio in the airline industry is 19.7, Delta Airlines boasts a P/E ratio of 8.01 .

All other factors being equal or better, the lower the figure the more attractive an investment is.

2. Vote of confidence from Wall Street

Delta Airlines is currently highly rated by Wall Street. At present, it boasts a consensus rating of Overweight . None of the 19 analysts covering the stock having issued a call to sell. More than half of the analysts have issued a Buy rating.

Delta Airlines
More than 50% of analysts rate DAL a Buy. | Source: WSJ.com 

The average stock price target of DAL is $70.13. From current levels, that’s a potential gain of over 50%.

3. Delta best placed to ride out the storm least bruised

According to airline industry blog Simple Flying, Delta beats its competitors on key metrics  based on the most recent full-year results.

Relative to American Airlines Group (NASDAQ:AAL) and United Airlines Holdings (NASDAQ:UAL), Delta had the superior fuel hedging strategy. Delta’s average cost per gallon in 2019 was 2.04 while American and United stood at 2.07 and 2.09 respectively.

In an environment where cost-efficiency will be crucial to staying afloat, and where fuel costs constitute a huge part of the expenses, Delta is likely to suffer the least as the coronavirus outbreak nearly grounds global air travel to a halt.

Additionally, Delta has not had to cancel flights or suffer from lower profitability over the grounding of 737 MAX jets. This is because the airline does not have the Boeing model in its fleet.

With the purchase, Warren Buffett has once again lived true to his investing philosophy of being “fearful when others are greedy and greedy when others are fearful.”

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.