On Feb. 27, Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) acquired just under 1 million shares of Delta Air Lines (NYSE:DAL) for an average price of $46.40 per share. The purchases increased the number of Delta’s shares held by Berkshire by 1.3%. Following the transaction, the holding company owned 71.9 million shares of DAL stock, or 11.2% of the airline’s outstanding stock.
Since Berkshire purchased those shares, Delta’s lost 37% of its value. Logic would suggest that if Buffett thought the airline’s stock was worth $46 per share at the end of February, they’re definitely worth $29 today.
Maybe. Maybe not. Let’s look at both sides of the argument.
Buffett Buys When Others Sell
No one seems to like to buy while everyone else is selling as much as Warren Buffett. So I can’t imagine that Buffett’s company would increase its stake in the airline if he didn’t think it was worth much more than $46 per share.
DAL stock fell to as low as $19.10 on Mar. 18, but it has since recovered some of those losses on news of the economic stimulus and the loans and grants that will be provided to passenger airlines. As a result of the stimulus package, Delta CEO Ed Bastain has said that the company’s employees won’t face pay cuts or involuntary furloughs.
“During the past few weeks I have had multiple conversations on a daily basis with our nation’s leaders about the need for emergency relief,” Bastian wrote. “They recognize the leading role the airlines and our people will play in the coming recovery when the COVID-19 (coronavirus) crisis recedes. I thank our leaders for their quick and strong response to this challenge.”
Delta’s CEO is now in a much better frame of mind, and the company’s stock price is much cheaper than it was a month ago. Unless something’s fundamentally changed about Berkshire’s faith in the airlines over the past month, it ought to be buying more shares of Delta.
There Might Be Better Buys Than DAL Stock
Buffett is well-known for owning big stakes in four of America’s largest passenger airlines. He owns 11.2% of Delta, 10.4% of Southwest Airlines (NYSE:LUV), 8.8% of United Airlines (NASDAQ:UAL), and 10% of American Airlines (NASDAQ:AAL).
Up and down the list of Berkshire’s equity positions, there are a lot of good companies that have been beaten down in recent weeks. For example, American Express (NYSE:AXP) was down 21% in the month that ended on Mar. 27, including dividends. Maybe Buffett will decide to add to his 18.8% stake in American Express.
A relatively new stake in Berkshire’s portfolio is Restoration Hardware Holdings (NYSE:RH), the growing furniture and home decor retailer that’s known as RH. Berkshire first started acquiring RH’s stock in the third quarter of 2019 when it picked up $206 million of the retailer’s shares.
Now changing hands for around $105, RH is trading slightly below what Berkshire paid for its 1.7 million shares. Considering the retailer was trading for as much as $256 in mid-February, Buffett and his investment lieutenants are likely gobbling up RH stock.
The Bottom Line
With $128 billion in cash at the end of 2019, Berkshire Hathaway has plenty of ammunition it can use to buy low-priced stocks such as Delta. I’d be shocked if Buffett didn’t buy more shares of Delta when it fell below $20 in March.
But as I said about United Airlines’ stock in my Mar. 20 column, if you must buy Delta’s shares, the smarter way to do so is by owning Berkshire stock. Warren Buffett can afford to be wrong about the airline, but many investors can’t.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
