Warren Buffett’s longevity is no accident, nor are his famed returns as an investor. And when it comes to airliner Southwest Airlines (NYSE:LUV), it’s not too late to take notice of Buffett’s recent actions before considering booking your own trip in LUV stock. Let me explain.
The coronavirus has been tamed. Well, at least on Monday it looks that way in Wall Street’s eyes. The broader averages are healthily bid following fresh reports new coronavirus cases may have slowed in the U.S. and peaked globally. But Southwest and fellow airline stocks haven’t been entirely cleared for takeoff.
On the session, shares of Southwest are up over 1% and trailing the S&P 500’s burly gains of more than 5.5%. Monday’s weaker performance in Southwest follows stalled negotiations on Capitol Hill as Democrats urged the U.S. treasury to refrain from demanding unreasonable stakes in the airlines in exchange for $32 billion in assistance to the industry or be prepared for future bankruptcies. But that’s not the only issue with Southwest Airlines right now either.
Another weight on the carrier and peer Delta Air Lines (NYSE:DAL) — which hints at greater potential downside risk for shares — is last week’s canary-like warning from Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). Friday, news broke that Warren Buffett’s storied investment fund sold 2.3 million shares of Southwest valued at $74 million. That’s about 4% of Berkshire’s position. The sale also puts the company’s stake in the airliner just beneath the 10% reporting threshold. Similar actions were taken in Delta stock.
Importantly, investors won’t be able to confirm the firm’s actions in LUV stock until 45 days after the close of the quarter. But does it really matter, given Berkshire Hathaway still owns a massive chunk of Southwest? There are strong indications it should.
The partial closing of the firm’s Southwest Air and Delta positions follows Berkshire’s purchase of nearly one million Delta shares in late February during the onset of the coronavirus in the U.S.
The firm was obviously a bit more optimistic not that long ago.
It’s also an about-face from an even more recent interview where Warren Buffett proclaimed “I won’t be selling airline stocks” as optimism turned into equanimity while the pandemic unfolded.
LUV Stock Monthly Stock Chart
Source: Charts by TradingView
Bottom line, for the famed longer-term value investor whose reputation is rooted in the words of being greedy when others are fearful, a reduced stake in LUV stock is a concern. Respectfully, it’s an indication shares could fall much lower before a meaningful bottom forms.
To be clear, short-term I wouldn’t discount a bear market rally given the current and mostly oversold price action in Southwest Airlines. Shares are outside the lower monthly Bollinger Band, the stochastics indicator is in a fairly weak position and the daily chart has formed a double bottom. And given a rally, a Fibonacci cycle from February’s lower-high pattern shows decent breathing room on the price chart before resistance comes into play. That could be a windfall for more nimble investors.
At the end of the day, though, LUV stock is likely to be a better shorting opportunity on rallies than a name which offers safe longer-term passage for bulls. And for a seat change which favors the latter? Patience — and maybe some additional blood on the tarmac — could prove beneficial.
Investment accounts under Christopher Tyler’s management do not own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
