5 Reasons Both You And Berkshire Should Buy Southwest Airlines

Jul. 18, 2018 7:48 PM ETSouthwest Airlines Co. (LUV)BRK.A, BRK.B31 Comments

Summary

  • Berkshire Hathaway has an enviable problem, which is how to invest its nearly $100 billion in excess cash pile.
  • Warren Buffett has said he's interested in buying entire companies, and in recent quarters, Berkshire has taken major stakes in no less than four US airlines.
  • Buffett himself has indicated the company would be open to acquiring an airline, and analysts think that Southwest is the most likely candidate.
  • There are five reasons why Berkshire might indeed want to buy Southwest outright. If it doesn't at today's valuation, Southwest is likely to make an excellent long-term dividend growth investment.
  • But, of course, as with any stock, there are several risks to consider before investing in Southwest.

(Source: imgflip)

Berkshire Hathaway (BRK.A) (BRK.B) has a great problem right now. Mainly that it's sitting on a mountain of nearly $100 billion in investable cash. Over the past 50 years, Berkshire, under the value focused leadership of legendary value investors Warren Buffett and Charlie Munger, has managed to absolutely destroy the market, enriching countless investors over that time.

ChartBRK.A Total Return Price data by YCharts

However, the downside is that Berkshire has now grown so large that it's preferred strategy of acquiring entire companies is making it harder to find needle moving acquisitions. That's especially true as the bull market is now in its 10th year, and Berkshire struggles to find attractively valued companies to unleash its "elephant gun" on.

That doesn't stop analysts and investors from watching the Oracle of Omaha's capital allocation decisions closely, often using the company's 13F disclosures (which tell us what Berkshire's portfolio looks like) to try to determine what companies or industries Buffett and company think might be attractive.

Personally, I'm not one to track Berkshire's buys and sells all that closely, since I realize that Buffett's goals, time frame, and risk profile does not perfectly match that of my own dividend growth retirement portfolio.

That being said, I do think it's often useful to consider what Berkshire is buying, or potentially considering buying, when coming up with possible investing ideas. That's because Buffett's focus on buying quality companies for the long-term at attractive valuations is ultimately one that history has shown is the best approach for investors to take.

In recent quarters Berkshire surprised many investors by investing heavily into airlines, including:

  • United Airlines (UAL) - 10.0% stake
  • American Airlines (AAL) - 9.8% stake
  • Delta Airlines (DAL) -7.8% stake
  • Southwest Airlines (NYSE:LUV) -8.2% stake

In fact, back in February 2018, Buffett even told

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