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Idea of the Month: Buy What Buffett Won’t

An interesting investment idea for this month, plus another personal buy and a couple updates

By Travis Johnson, Stock Gumshoe, December 18, 2015

We were talking about Warren Buffett just yesterday, and I also recently was looking into flights to go to the annual meeting in the Spring, so everyone’s favorite avuncular billionaire was on my mind this week… and it was almost like he was talking in my ear as I was plotting this “Idea of the Month” piece saying, “no, don’t do it! It never works!”

But I think it might.

I’m talking, if you haven’t already guessed, about airlines. This is probably Warren Buffett’s most famous quote about investing in airlines, made after his not-all-that-disastrous (but regretted, for some reason) investment in US Air about 20 years ago:

“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.”

That hasn’t been true over the past couple years — airlines have stopped competing aggressively on price thanks to cutbacks in service and consolidation, there have been fewer people stepping in to start new airlines, and they’ve all focused on profitability. That has driven all the major airline stocks higher as the survivors of the consolidation wave (and a bankruptcy or two) have been flying mostly-full planes for two years. Most of the U.S. airline stocks have at least tripled in price over the last five years, and that’s a huge return for what are very large, capital-intensive companies. That might be ending now, and it might be that the airlines fall back into their bad habits of a decade or two ago, but I don’t see that happening anytime soon.

I personally bought into the industry on what looked like a silly dip during the Ebola scare, when airlines gave up most of their ...

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