Prepare for landing: Why airline stocks may (or may not) take your portfolio to new heights
When the coronavirus pandemic hit the U.S. stock market, the results were catastrophic. The Dow recorded its worst month since the October 2008 crash, its worst quarter since the 1987 crash, and its worst first quarter in history. On February 27, the Dow recorded its largest drop ever, losing 1,190 points. Then on March 9, the Dow fell 2,013.76 points, making that the biggest drop ever.
The S&P had also its worst month since October 2008. And the NASDAQ recorded its worst month since November 2008.
And with both domestic and international travel at a standstill, airline stocks were hit especially hard. One of the largest airlines in the world, Delta (DAL), saw its stock drop 20%. That’s when famed investor Warren Buffett saw an opportunity. Through Berkshire Hathaway, Buffett bought $45 million in Delta Airline stocks (nearly 980,000 shares).
Why Delta? Unlike many other airlines, Delta’s fleet does not include any of the ill-fated Boeing 737 Max planes, meaning the airline didn’t lose millions of dollars when the aircraft was grounded. Did Buffett make a smart move? Should you follow his lead? Are there other airline stocks that belong in your portfolio?
Is it time to take your portfolio for a flight on the friendly skies with airline stocks?
Airline stocks are anything but simple, and they are highly vulnerable to changes in the global economy. Everything from the price of oil to unemployment figures to global pandemics have an outsized impact on airline companies’ earnings. Even public perception can bring overnight changes to share prices.
In early 2017, there was an incident where a passenger on a United Airlines (UAL) flight was dragged from the plane. The airline stock plunged as a result, losing more than a billion dollars in value. Shortly thereafter, United CEO Oscar Munoz testified before Congress, and the stock surged from its previous close of 70.27 to close at 73.94, for a gain of 5% on the day. In dollars, that gain was worth more than $2 billion in value.
Or look at American Airlines (AAL). It was bankrupt in 2011; it merged with US Airways in 2013; and by 2017 it was raking in $40.4 billion per year.
There are some important lessons to point out here, though. One-time events can easily and briefly disrupt the stock market - and individual stocks, such as airline stocks. Your personal success as a stock investor hinges on your ability not to get caught up in the two major emotions that drive investment markets over the short term: fear and greed. If you later become seasoned enough to capitalize on other investors’ fear and greed, then you’re probably going to become wealthy, because investment opportunities abound when stocks rapidly rise or fall.
What this all means for your investment strategy
The fact is that airlines are taking a huge financial hit. In fact, the biggest underperformers by far in the wake of the coronavirus lockdowns have been airline stocks. Indeed, the airline industry is widely expected to remain under pressure for months—if not years—as travel restrictions and fear of contracting the virus will discourage millions of Americans from flying.
As an example of the industry as a whole, U.S. Global Jets ETF (JETS), which primarily tracks the performance of U.S. airline companies, is one of the market’s biggest underperforming ETFs.
Simply put, some airline companies aren’t positioned to survive major setbacks and in many cases, even the survivors will take a long time to overcome the impact of any significant upheaval.
As for your airline stocks? Or the ones on your wish list? There are no guarantees in the stock market. But there are steps you can take to minimize your losses and also maximize your profits, no matter what stocks you’re looking at.
1. Set a price target the day you purchase your stocks.
2. Set a stop-loss limit the day you purchase your stocks.
3. Diversify your portfolio to reduce your overall portfolio risk, as well as volatility.
4. Put some dividend-paying stocks in your portfolio.
5. Rebalance and reposition your portfolio.
And Warren Buffett? If there’s any one investor who would be worth emulating, it’s him. But guess what happened with all those airline stock he bought?
Not long after making a multi-million dollar investment in airline stocks, Buffett declared that he’d made a mistake, and sold his entire portfolio of U.S. airline stocks at an enormous loss.
What is your opinion of airline stocks? Do you think they are poised for major profits or do you prefer to keep your portfolio on the ground? Share your thoughts in the comments.