What Can Investors Learn From Berkshire Hathaway’s Recent Investment In Airlines

Recently, Berkshire Hathaway revealed it had stakes in American Airlines Group, Delta Air Lines, United Continental Holdings and Southwest Airlines.

Berkshire, which is run by the legendary investor Warren Buffett, has repeatedly shocked its long-term devotees by investing in businesses that he has previously shied away from. These include the likes of Apple and IBM (technology) and General Motor (bad automotive business).

Now he has turned his attention to airlines.

Buffett has, on numerous occasions, decried airlines as bad businesses. One example of his previous investment is USAir.

Despite the headlines such as “Warren Buffet Buys Airline Stocks”, investors may want to delve a little deeper.

It may not, for instance, be Buffett who has invested in these stocks. It could have been one of his fund managers that are responsible for the purchase.

Nevertheless, there are a few lessons that we can learn from Berkshire’s latest move, regardless of whether Buffett made the final call.

Keep An Open mind

John Maynard Keynes once said: “When the facts change, I change my mind. What do you do, sir?

As investors, we should base our investment decision on facts. So, if the facts have changed, we should adjust our conclusions too.

Though the airline industry has historically haemorrhaged cash, things might have changed recently. According to Bloomberg article, years of consolidation has cut the number of major players by more than half. Additionally, the price of oil has stayed low for the last two years.

Both factors might have changed the economics of the industry.

Valuation matters

A good company may not necessarily be a good investment unless it valued appropriately. An average or even below-average company could even be interesting provided it is cheap enough.

So, depending on whether you are a growth, income or value investor, the approach could be different.

But regardless of which school you belong, valuation matters.

Coming back to Berkshire Hathaway’s latest purchase, investors might want to note one common theme with the four airlines – they all trade at attractive price to earnings ratios of between three and eight times.

By comparison, the SPDR S&P500 ETF is trading at a P/E ratio of 17.64 times.

Given that even Berkshire Hathaway is investing in airline stocks, should we do so too?

There are a few local ones to choose from. They include Singapore Airlines Ltd (SGX: C6L), AirAsia Berhad (KLSE: 5099.KL) and AirAsia X Bhd (KLSE: AAX).

But bear this in mind. These airlines operate in a completely different environment. For example, Asia has seen more players joining the party in the past few years, as opposed to consolidation that has been happening in some developed countries.

And just because some great investors are doing something, it doesn’t mean that we should follow.

But one message is clear – aviation is a sector that could be worth exploring further.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.