airline industry

Portfolio Themes: December 2020
photo shows airplane at an airport at sunset

Our investment research process is bottom-up: we look first at individual companies, screening for bargains and dividends, checking out ideas, reading SEC filings and news reports.

But certain themes do tend to emerge, as favorable opportunities often cluster in one industry or sector.

Thinking about the big picture, it seems to us that inflation may surprise on the upside in the months and years ahead. The COVID-19 pandemic—suppressing activity on a global basis—may give way to a synchronized global recovery. With not enough production capacity attempting to supply material and goods through a transportation network constrained by the crisis, shortages may lead to higher prices.

Record tides of debt and monetary stimulus may create more purchasing power than there are goods and services to purchase. Therefore, we are striving to avoid low-interest bonds and other investments that expose us to the risk of loss from inflation.

Our most recent additions to the “buy list” reflect favorable valuations in companies we believe to be durable—and fundamental to our lives. We will still require food and shelter and medicine in the future; finding bargain prices in profitable, dividend-paying providers is a joy.

We have revised an older theme—airlines and related companies—to focus on those with the most durable balance sheets. The airline industry has faced new challenges in the pandemic, and an industry under stress presents an opportunity… but we need the companies to survive in order to live through the current difficulties. (Hence the focus on only the strongest.)

Certain natural resource holdings have become market darlings. We began investing in them years ago, sometimes adding at lower prices as we waited for the turn to come. Our patience is being rewarded, and we believe this theme has years to run.

This is not a comprehensive list, of course, but covers some of the dominant themes we are seeing today.

Clients, if you would like to discuss these or offer additional ideas, please email us or call.

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YOU DON’T GET WHAT YOU GIVE
photo shows two rocks balanced on a flat rock on top of a triangular rock with water in the background

We’re not pessimists, by any stretch, so we’ll apologize now for the “gotcha” headline. But do you always get what you give? No, you don’t.

When you invest a dollar, it rarely works out such that you make only a dollar or lose only a dollar. Returns aren’t symmetrical: it’s not one dollar in, one dollar out. It could be one dollar in… and many dollars out. Or pennies. No guarantees.

Our core investing philosophy guides us toward those investments that are likely to stay robust and provide healthy returns for the long haul. However, there is room in some accounts to consider more speculative investments from time to time.

Take Silicon Valley, for example, which is full of disruptive visionaries trying to turn the auto industry upside down. Maybe they are geniuses, and maybe not so much: they could go broke in the blink of an eye. But if an upstart company can capture 3% of the new vehicle market over the next few years, the payoff may be considerable. That could be an opportunity.

As another example, some time ago we invested in a flyer—a fairly risky company at the time—because we figured we might make five times our money if it worked out, and we would only lose one time our money if it didn’t. There were no guarantees either way, but the potential reward dwarfed the potential cost.

There are examples that ought to be cautionary tales, times when the potential reward is so tiny compared to the potential cost. Consider the choice of racing across the train tracks as the arms start coming down. Potential reward? You could save five minutes. Potential cost? The whole rest of your life.

Not worth it.

We can’t know the future, and we are always dealing with uncertainty. But we can think about the possibilities and work to understand the potential outcomes. This applies to investing and life: it’s why we took that flyer, and it’s why we do the practically free things that might help us live longer, healthier, happier lives.

Do you always get what you give? No, but it’s easier to find our opportunities when we understand the consequences.

Clients, when you’d like to talk about this or anything else, please write or call.

Portfolio Developments, Emerging Themes

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This has been an eventful year in the markets, to put it lightly. Unforeseen events have had dramatic effects.

We wrote about some of the themes in our portfolios last fall. Airlines and biopharmaceutical companies both seemed attractive, with valuations at seemingly favorable levels. Needless to say, global pandemics turn out to be as great for biotechs as they are lousy for airline travel.

Our natural resource holdings had similar variation. Turmoil helped the shares of precious metal miners and hurt the shares of industrial metal producers as much of the global economy shut down.

We are keeping the long view in mind. The next energy revolution, driven by solar power and batter storage, will still require higher production of copper and other minerals. The decades-long trend toward higher levels of air traffic will resume. These are our views.

As we review the finances and prospects of our holdings and rebalance where appropriate, another theme has emerged. The shares of some basic kinds of companies, those involved in food and shelter and beverages, have gotten to bargain levels, in our opinion. It seems like it has been a long time since we felt that way, and we are excited to add holdings in these lines.

Last fall we believed that international equity markets had some attraction based on value compared to US holdings. We are more excited now about the emerging bargains we perceive here in the US.

Clients, these are the conclusions our principles and our processes are leading us to. If you would like to talk about this or anything else, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. .

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets..

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Up In The Air

© Can Stock Photo / jefras

We have written before about the miracle of air travel. You can go from breakfast on the coast to lunch in the middle of the country, renting the use of an $80 million machine and the services of $1 million in payroll for just a couple hundred dollars.

It is no wonder that US passengers flew 57% more miles in a recent year than they had twenty years before. This record of growth included the disruption caused by terrorists on 9/11. Our commercial aviation system was used against us, to devastating effect. Dramatic changes in the flying experience resulted. But traffic volumes still grew over the long term.

The global COVID-19 pandemic has created a larger shock to air traffic volumes. Noted investor Warren Buffett, who had previously invested in four major US airlines, recently announced the sale of those holdings by his firm. Many are wondering what to think.

Our research and thinking will continue to evolve, but we do have thoughts to share.

  • Buffett had the luxury of selling out before news of his sales depressed the share prices. What we may choose to do today is a different set of choices than what could be done last month.
  • Although he is arguably the most successful investor in all of human history, he has proven to be wrong from time to time. (We treasure those moments when we were right and he was not– just ask us, we will tell you all about them.)
  • Buffett’s original idea, that he was buying $1 billion per year of earning power for an $8 billion investment in airline ownership, became obsolete. But perhaps the buyers of those shares have purchased $1 billion per year of future earning power for less money, $6 billion. No guarantees.

The future of air travel and participating companies is up in the air. But it seems likely to us that the miracle of air travel will sooner or later exert its charms over an increasing number of people from year to year. We are working to understand what this all means in terms of investment opportunities and challenges.

Clients, if you would like to talk about this or anything else, please email us or call.

Four Trends for Fall, 2017 Edition

© Can Stock Photo / javarman

The gap between consensus expectations and reality as it unfolds is where profit potential lives. This is why we put so much effort into studying trends and the ramifications for investors.

Here are four trends we’ve been watching for some time:

1. The cost of solar electricity and battery storage, being forms of technology, are declining year by year. In some places around the world, this combination may already be the most cost-effective way to provide new electrification. We believe we will see the end of fossil-fuel-powered generating plant construction within the next decade or so. This will not happen because of environmental activism, but because of compelling economics.

The investment ramifications are manifold. There will be winners and losers, and we have been investing in accordance with our developing understanding of how this is going to play out.

2. The world’s most populous democracy, India, may be poised for decades of economic growth much like China experienced over the past thirty years. Moreover, by 2050 India is projected to be the most populous country in the world. China will be surpassed as a result of its short-sighted ‘one child policy’ that created a huge demographic challenge with an aging population.

By getting in early, even a small investment allocation may make for significant potential gains over years ahead. No guarantees, of course.

3. The airline industry, after nearly a century of cutthroat competition that resulted in wave after wave of bankruptcies, has consolidated into a handful of companies that compete much more gently, to their mutual profit. The energy revolution may result in lower prices for fuel in the future—a large part of airline operating costs. And continuing development around the globe bodes well for air traffic volume trends.

The consensus expectation in the market seems to be for a return to the bad old days of costly competition. But we believe the industry has fundamentally changed due to the dramatically lower number of competitors after years of mergers and consolidation. Consequently, stocks in some of the major airlines appear to be bargains.

4. The Federal Reserve and other central banks around the world are set to begin unwinding the interventions used to effect the so-called “zero interest rate policy”, the policy by which the Fed kept the effective federal funds rate close to 0% following the recession of 20081. While restoring returns on bank savings and certificates may be a good thing for savers, rising rates on bonds will cause the value of existing bonds to go down. When you think about it, a 2% bond cannot sell for its full face amount in a 4% world.

Many parts of the fixed income universe appear to be distorted by the central bank policies. We believe that massive amounts of money flowed into mispriced assets in an attempt to find safety.

Clients, these are the things that have caught our attention. We cannot know the future, but it makes sense to try to get a better handle on it than the average market participant. We can offer no guarantees except that we will continue to put our best effort into the endeavor. If you have any questions or comments or insights to add, please email us or call.

1Federal Reserve Bank of St. Louis, Federal Reserve Economic Data

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.