Warren Buffett Sold Southwest Airlines Stock Way Too Early

Thanks to the novel coronavirus, airline stocks are seriously suffering. Southwest Airlines (NYSE:LUV) fell from $58 to $25.80. But LUV stock isn’t alone.

Since peaking at $30.78 in February 2020, American Airlines (NASDAQ:AAL) plunged to $9.56. Delta Air Lines (NYSE:DAL) fell from $60 to $22. United Airlines (NASDAQ:UAL) plummeted from $84 to less than $24. Spirit Airlines (NYSE:SAVE) fell from $44 to less than $10.

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These stocks have all been decimated by stay-at-home orders, travel restrictions and earnings disasters.

Worse, according to Cowen analyst Helane Becker, “Most airline managements are realizing that domestic traffic will be slow to recover, in part because the country is opening at different times. Until various quarantines are lifted and most people get back to work we do not see any recovery for air traffic.”

News that Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) just sold all of its airline holdings didn’t help. However, it appears Buffett may have overreacted by selling too early. After all, as Buffett himself used to say, “be fearful when others are greedy, and greedy when others are fearful.”

While I wouldn’t back up the truck on airline stocks, they have become some of the top blood-in-the-street opportunities. That includes LUV stock, which could recover to $57 in the long term.

Berkshire Hathaway Sold Airlines Too Early

As I pointed out earlier this week, Warren Buffett sold out of fear. Part of his reasoning:

“I don’t know whether it’s two or three years from now that as many people will fly as many passenger miles as they did last year. The future is much less clear to me about how the business will turn out through absolutely no fault of the airlines themselves.”

I agree with Southwest Airlines CEO Gary Kelly who says Buffett is being far too pessimistic.

“It’s a pessimistic one. I am far more optimistic,” Kelly said in regards to Buffett’s reasoning. In addition, the CEO said he doesn’t believe the industry will see a sustained downturn in air travel. “I believe this too shall pass. You go back to the Spanish Flu in 1918, it was followed by the roaring 20’s. Life will get back to normal. It is a question of how long that is going to take.”

Plus, as I noted earlier this week, Kelly recently told Face the Nation that it’s safe to fly again. “I don’t think the risk on an airplane is any greater risk than anywhere else,” Kelly said. “I think we’ve seen the bottom here in April. Each week after the first week of April has gotten successively better. I think May will be better than April was. I don’t think June will be a good month, but hopefully it will be a bit better than May.”

LUV Stock May Already Reflect the Worst-Case Scenario

Again, I wouldn’t back up the truck on airline names like LUV stock just yet. But, they have become top buying opportunities at current prices.

Results at Southwest Airlines could get a lot worse in the second quarter of 2020. In fact, the company has already said April 2020 revenues will decrease 90% to 95% year-over-year. Available seat miles could fall about 60% year-over-year. May 2020 operating revenues could also fall, with capacity falling in a range of 60%-70% as well.

However, LUV says its daily cash burn rate could decrease to $30 million to $35 million in the second quarter, as compared to earlier expectations for a range of $60 million to $65 million.

Also, a good deal of negativity may be fully priced into the stock. While LUV stock isn’t going to recover overnight, it’s still one of the safest bets in the airline industry.

With time, plenty of patience and an eventual return to normalcy, LUV stock could return to $57.

Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/warren-buffett-sold-luv-stock-too-early/.

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