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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

These Factors Show Why Buffett Likes Airlines Again
December 14, 2016

Last month we learned that Warren Buffett bought shares of American Airlines, Delta Air Lines and United Airlines, according to Berkshire Hathaway’s third-quarter regulatory filings. He also confirmed that he purchased Southwest Airlines stock as well. If we look at the Dow Jones U.S. Airlines Index year-to-date, these allocations appear to have been well-timed.

Buffett Bought at Airline Bottom
click to enlarge

Buffett is universally recognized as one of the most influential investors of all time, so his decision to book a flight on airlines, after blasting the industry for years, is worth examining more closely.

Protected by an Economic Moat

We can mention a couple of things upfront. Most everyone knows Buffett is a value investor. He seeks equity in companies that the market has undervalued—including airlines. As I’ve pointed out before, if we use price-to-earnings as our valuation metric, airlines are among the least expensive in the industrials sector.

He also likes companies that are protected by what he calls a “moat,” the “something” that prevents new competitors from disrupting the industry, giving the veteran players a clear advantage in the marketplace. This is why Buffett has always been attracted to railroads. Because rail is prohibitively capital-intensive, the barriers to entry are high and competition is limited, giving companies greater market power.

Why Buffett Likes Airlines: Protected by a Moat

We see a similar moat protecting U.S. airlines. Since the industry consolidated a decade ago after a wave of bankruptcies, a vast majority of the market share is now concentrated in the big four carriers. In 2015, American, Delta, United and Southwest controlled about 77 percent of U.S. airline revenue.

These are pretty high-level factors to consider. When we delve deeper into the factors Buffett uses to assess equities, the airlines group becomes even more attractive.

Airlines Crushed the Broader Market

What you see below are the top 10 U.S. airlines compared to the S&P 500 Index, using four of Buffett’s favorite financial metrics:  return on equity, cash flow return on invested capital, net income margin and free cash flow per share. As of the third quarter, the airlines group trounced the broader market in all four areas for the 12-month period. This might have contributed to Buffett’s decision to rotate back into a space he spent a couple of decades deriding.

Buffett's Favorite Factors Applied to Airlines and S&P 500
click to enlarge

You can find the definitions of these factors on Investopedia, but they’re pretty self-explanatory.

Return on equity (ROE) measures how much profit a company generates with shareholders’ money. Whereas the S&P 500 returned about 14 percent during the 12-month period, airlines returned 36 percent of equity.

Cash flow return on invested capital (CFROIC) tells investors how much cash flow a company produces as a percentage of its total capital. CFROIC was 35.60 percent for carriers, 14.90 percent for blue-chip stocks.

Net income margin, simply put, is the percent difference between a company’s sales and its net profits. In the past, airlines were notorious for having razor-thin margins. That’s all changed thanks to industry consolidation, restructuring of businesses and the addition of new revenue streams. The top 10 airlines saw margins of more than 12 percent, while S&P 500 margins were 9.8 percent.    
Finally, free cash flow per share is exactly what it sounds like. It’s sometimes used as a proxy for earnings per share, but it specifically measures a company’s ability to pay back loans, taxes and other expenses on a per-share basis. Airlines beat the S&P 500, $4.1 per share to $3.3 per share.

Airlines have definitely come a long way since Buffett invested in—and lost money on—US Airways back in 1989. If you’re interested in learning more, I invite you to join me during my next webcast. I’ll be discussing how airlines reversed their fortunes from near-bankruptcy to record profitability, and where they might go from here.

I hope you’ll join us!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Dow Jones U.S. Total Market Airlines Index is constructed and weighted using free-float market capitalization and the index is quotes in USD.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio can be calculated as: market value per share / earnings per share.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 9/30/2016: Alaska Air Group Inc., Allegiant Travel Co., American Airlines Group Inc., Delta Air Lines Inc., Hawaiian Holdings Inc., JetBlue Airways Corp., Southwest Airlines Co., Spirit Airlines Inc., United Continental Holdings Inc., Virgin America Inc.

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Time to Take Trump Seriously on Infrastructure Spending?
December 8, 2016

Cancellation new Air Force One project

Earlier I shared with you that when it comes to President-elect Donald Trump, the media takes him literally but not seriously. His supporters, on the other hand, take him seriously but not always literally.

We saw an example of this polarity Tuesday morning when Trump took a shot at Boeing, tweeting to his nearly 17 million Twitter followers that the jet-manufacturer “is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!”

When journalists sought clarification, Trump said he wants Boeing to make money, “but not that much money.”

As the Wall Street Journal pointed out, the current Air Force One has been in use for 30 years—since Ronald Reagan’s administration—and includes many cutting-edge modifications for communications and defense. It’s designed to withstand a nuclear blast. For the value we get out of the president’s main ride, in other words, the exorbinant sticker price might not be so exorbinant as it initially appears.

But then, the $4 billion Trump refers to couldn’t be confirmed. Boeing responded by saying it’s currently under contract to build the jet for only $170 million, and production hasn’t even begun yet.

Again, in questioning the details of Trump’s tweet, the media might be missing the forest for the trees. It’s possible the president-elect means simply that we need to keep government cost overruns in check—not literally cancel the Air Force One order—something we can all agree with.

Investors Take Trump Seriously—and Somewhat Literally

Investors have so far managed to find the right balance between taking Trump seriously and literally, to a certain extent. Since Election Day, small-cap stocks have rallied more than 12 percent, suggesting the market sees Trump’s “America First” policies benefiting them the most. Because they have less exposure to foreign markets than blue-chip companies, small caps are in an attractive position to take advantage of lower corporate taxes, streamlined regulations and a stronger U.S. dollar.

The market’s also betting big on Trump’s proposal to spend $1 trillion on infrastructure over the next 10 years. For the one-year and three-month periods, the energy and materials sectors were among the best performers in the S&P 500 Index. Both landed in the “leading and gaining” quadrant in the chart below. 

energy and materials among the best sp 500 sectors
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We see similar results in the small-cap Russell 2000 Index. Materials and processing was the best performer for the one-year period while energy led over the past three months.

energy and materials among the best russell 2000 sectors
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Granted, a lot of the growth in energy can be attributed to OPEC’s recent announcement that it would trim production for the first time since 2008. Such an agreement was rumored back in October. Oil rallied sharply following the announcement but has retreated slightly on news that the cartel raised production to more than 34 million barrels a day in November. Speculation is also high on whether non-OPEC countries such as Russia will join the coordinated effort to help prices recover.

But like small-cap stocks, energy and materials appear to be getting a boost on hopes that Trump will make good on his commitment to opening the fiscal valves. If he succeeds at getting what he wants from Congress, we could very well see another major infrastructure boom and commodities bull market similar to the one led by China a decade ago.

No Better Time Than Now

Construction Californias Shasta Dam

It’s worth noting that Trump will likely face some tough opposition from Congress. Even though most of the $1 trillion will allegedly come from private investment, the same fiscal conservatives who said no to President Obama’s 2009 stimulus package, worth over $800 billion, might also balk at Trump’s request.

But if the government is serious about rolling out such a monumental spending package, there’s really no better time than now, with borrowing costs still at near-historic lows.

As Steve Bannon, Trump’s controversial advisor, told the Hollywood Reporter: “With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Shipyards, ironworks—get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”

I don’t know if I’d be so flippant about $1 trillion, but most everyone agrees that more needs to be done about our nation’s infrastructure. According to the American Society of Civil Engineers (ASCE), each American household could lose as much as $3,400 per year if roads, bridges and tunnels never see an upgrade. The longer we put off repairing our infrastructure, the more expensive it might get.

In a report this week, Deutsche Bank agreed that the U.S. should dream big or go home:

To drive strong infrastructure spending growth, the country will need to get much more aggressive in building new (or replacing) major transport bridges and tunnels, and to reach for Earth-altering infrastructure that addresses national risks like floods, droughts… If the U.S. is to meaningfully stimulate its economy via infrastructure, it must think bigger and act quicker.

Besides roads and bridges, Deutsche writes, the U.S. should pursue “ten-figure projects” such as levee systems, storm protection systems, water tunnels and river dredging, not to mention “new science and technology super structures like new rocket building and launch facilities, biotech labs,” and “next-generation communication and air traffic control.”

Such projects would benefit many more people than those using them. According to BCA Research, public spending on infrastructure has one of the highest multiplier effects, making it more effective at stimulating the economy than tax cuts.

Not All Stimulus Is Created Equal

 

Estimated Multipliers

Type of Activity

Low Estimate

High Estimate

Purchases of goods and services by the federal government

0.5x

2.5x

Transfer payments to state and local governments for infrastructure

0.4x

2.2x

Two-year tax cuts for lower and middle-income people

0.3x

1.5x

One-year tax cut for higher-income people

0.1x

0.6x

Finally, the U.S. is due for another major infrastructure build. Under Obama, total public construction spending dropped relative to spending during his two predecessors’ administrations

total public u.s. construction spending fell under president obama
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Global Economy at Point of Inflection: OECD

Increasing infrastructure investment would be good not just for the U.S. but also the world economy, which has struggled to gain traction for the past couple of years. In its just-released Global Economic Outlook, the Organization for Economic Cooperation and Development (OECD) strongly endorsed the idea of “using the fiscal levers to escape the low-growth trap”—similar to what Trump has proposed.

With the U.S. and China both planning sweeping stimulus efforts in the next one to two years, the Paris-based group sees global GDP growing 3.6 percent in 2018, the fastest pace since 2011. The OECD also revised its earlier 2017 growth estimate to 3.3 percent, up from 3.2 percent.

increased government spending could help global growth pick up speed
click to enlarge

Speaking in Paris last month, OECD Secretary-General Ángel Gurría commented that “there is reason to hope that the global economy may be at a point of inflection.”

I agree. Although I have my differences with Trump, I’m optimistic he can negotiate an infrastructure deal that will jumpstart growth, both here and abroad.

Explore investment opportunities in commodities and natural resources!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 9/30/2016: The Boeing Co.

 
 

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Fidel Castro’s Cuba vs Lee Kuan Yew’s Singapore: A Tale of Two Economies (UPDATE)
November 29, 2016

On Friday, November 25, Fidel Castro died at age 90. The former revolutionary and hardline dictator of Cuba was among the 20th century’s longest-serving leaders, third only to Elizabeth II and Bhumibol Adulyadej, the King of Thailand, who passed away in October.

Castro’s death comes at a pivotal moment in U.S.-Cuban relations. With trade between the two countries on the path to normalization, and with U.S. airlines making scheduled flights to Havana for the first time in more than 50 years, President-elect Donald J. Trump has pledged to reinstate many of the Cold War embargos that were lifted by President Barack Obama.

“If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal,” Trump tweeted on November 28.

In light of Castro’s passing, we are rerunning this Frank Talk from March 2015, in which Frank compares and analyzes the widely divergent economies of Cuba and Singapore under their now-deceased leaders, Castro and Lee Kuan Yew. 

A Victoria's Secret in the Toronto Pearson International AirportIt would be nearly impossible to find two world leaders in living memory whose influence is more inextricably linked to the countries they presided over than Cuba’s Fidel Castro and Singapore’s Lee Kuan Yew, who passed away this Monday at the age of 91.

You might find this hard to believe now, but in 1959—the year both leaders assumed power—Cuba was a much wealthier nation than Singapore. Whereas Singapore was little more than a sleepy former colonial trading and naval outpost with very few natural resources, Cuba enjoyed a thriving tourism industry and was rich in tobacco, sugar and coffee.

Fast forward about 55 years, and things couldn’t have reversed more dramatically, as you can see in the images below.

Cube in 1950, Singapore in 1950, Cuba today, Singapore today

The ever-widening divergence between the two nations serves as a textbook case study of a) the economic atrophy that’s indicative of Soviet-style communism, and b) the sky-is-the-limit prosperity that comes with the sort of American-style free market capitalism Lee introduced to Singapore.

Sound fiscal policy, a strong emphasis on free trade and competitive tax rates have transformed the Southeast Asian city-state from an impoverished third world country into a bustling metropolis and global financial hub that today rivals New York City, London and Switzerland. Between 1965 and 1990—the year he stepped down as prime minister—Lee grew Singapore’s per capita GDP a massive 2,800 percent, from $500 to $14,500.

Since then, its per capita GDP based on purchasing power parity (PPP) has caught up with and zoomed past America’s.

Lee Kuan Yew's Singapore Flourished while Fidel Castro's Cuba Floundered
click to enlarge

Under Castro and his brother Raúl’s control, Cuba’s once-promising economy has deteriorated, private enterprise has all but been abolished and the poverty rate stands at 26 percent. According to the CIA’s World Factbook, “the average Cuban’s standard of living remains at a lower level than before the collapse of the Soviet Union.” Its government is currently facing bankruptcy. And among 11.3 million of Cuba’s inhabitants, only 5 million—less than 45 percent of the population—participate in the labor force.

Compare that to Singapore: Even though the island is home to a mere 5.4 million people, its labor force hovers above 3.4 million.

Singapore Had Third-Highest GDP Based on Purchasing Power Parity (PPP) Per Capita

Because of the free-market policies that Lee implemented, Singapore is ranked first in the world on the World Bank Group’s Ease of Doing Business list and, for the fourth consecutive year, ranked second on the World Economic Forum’s Global Competitiveness Report. The Heritage Foundation ranks the nation second on its 2015 Index of Economic Freedom, writing:

Sustained efforts to build a world-class financial center and further open its market to global commerce have led to advances in… economic freedoms, including financial freedom and investment freedom.

Cuba, meanwhile, comes in at number 177 on the Heritage Foundation’s list and is the “least free of 29 countries in the South and Central America/Caribbean region.” The Caribbean island-state doesn’t rank at all on the World Bank Group’s list, which includes 189 world economies.

Many successful international businesses have emerged and thrived in the Singapore that Lee created, the most notable being Singapore Airlines. Founded in 1947, the carrier has ascended to become one of the most profitable companies in the world. It’s been recognized as the world’s best airline countless times by dozens of groups and publications. Recently it appeared on Fortune’s Most Admired Companies list.

Singapore AIrlines

We at U.S. Global Investors honor the legacy of Lee Kuan Yew, founder of modern-day Singapore. He showed the world that when a country chooses to open its markets and foster a friendly business environment, strength and prosperity follow. Even on the other side of the globe, the American Dream lives on.

 

 

The Global Competitiveness Index, developed for the World Economic Forum, is used to assess competitiveness of nations. The Index is made up of over 113 variables, organized into 12 pillars, with each pillar representing an area considered as an important determinant of competitiveness: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

The Ease of Doing Business Index is an index created by the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.

The Index of Economic Freedom is an annual index and ranking created by The Heritage Foundation and The Wall Street Journal in 1995 to measure the degree of economic freedom in the world's nations.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2016.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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The Great American Splurge
November 28, 2016

Retail madness: more than 137 million american consumers plan to shop thanksgiving weekend

In a Frank Talk last week, I discussed the surge in small-cap stocks since Donald Trump’s election. A bet on smaller domestic stocks, I wrote, is a bet that Trump will deliver on his promise to “make America great again.” He plans to lower taxes, streamline regulations and spend big on infrastructure—all of which has led to a rally in the small-cap Russell 2000 Index and the 10-Year Treasury yield.

big moves in small-cap stocks and treasury yields since trump's election
click to enlarge

The ramifications of government policy change under Trump, especially fiscal policy, have the potential to be huge. Since Election Day, we’ve seen the strong U.S. dollar hurt gold, while the Canadian dollar and Chinese renminbi have dropped.

The question now is whether Federal Reserve Chair Janet Yellen will put the brakes on the so-called Trump rally. She asserts that Fed policy is not politically motivated, but I wonder how many people actually believe that. She’s already criticized Trump’s plans to tear up or at least significantly weaken Dodd-Frank Wall Street Reform.

Both former Fed Chair Alan Greenspan and billionaire investor Warren Buffett have recently suggested Dodd-Frank needs to go, with Greenspan telling CNBC that he’d love to see the 2010 law “disappear.” Buffett, meanwhile, commented in an interview this month that the U.S. is “less well equipped to handle a financial crisis today than we were in 2008. Dodd-Frank has taken away the Federal Reserve’s ability to act in a crisis.”

Retail madness: more than 137 million american consumers plan to shop thanksgiving weekend

Since the election, banks have seen strong inflows, as investors are betting that the financial industry could be one of the largest beneficiaries of Trump’s administration.

According to Evercore ISI analyst Glenn Schorr, “Animal spirits and higher confidence have returned, and investors are now expecting a better revenue, expense, tax, capital and regulatory profile for financials.” In addition, “we might have just flipped from feeling pretty late cycle right back to early cycle depending on how much we want to buy into Trump’s pro-growth agenda.”

Americans Take Advantage of Low Inflation

Last year, lower gas prices helped American households save $700 on average. Although savings aren’t likely to be as much this year, Americans managed to save in other ways—namely, food and beverages.

According to the American Farm Bureau Federation (AFBF), the cost of a typical Thanksgiving meal for 10—consisting of a turkey, stuffing, sweet potatoes, cranberries, a pumpkin pie and other traditional sides—fell 24 cents from last year’s average to $49.87. That translates to a per-person cost of just under $5, confirming that “U.S. consumers benefit from an abundant high-quality and affordable food supply,” says AFBF Director of Market Intelligence Dr. John Newton.

As I’ve said multiple times before, the U.S. shale oil boom helped deliver an “oil peace dividend” to the world, which drove transportation costs and, therefore, food and beverage costs down over the past two years.

A Thanksgiving Meal fell below $5 per person this year
click to enlarge

Low fuel costs also encouraged a huge number of families to hit the highway this Thanksgiving weekend. According to AAA, roughly 50 million people—about 1 million more than last year— journeyed 50 miles or more from their homes, the most since 2007.

With gas prices at their second lowest level in a decade, driving remains the most popular mode of transportation. But as I previously shared with you, flying has also become more and more affordable for many Americans. This week, an estimated 27 million passengers flew on U.S. airlines, an increase of 2.5 percent over last year.

27 million passengers will fly U.S. airlines this Thanksgiving week, up 2.5 percent from last year

Black Friday Is the New Cyber Monday

It isn’t just travel that’s back to pre-recession levels. This year, it appears more Americans than ever before—enjoying low inflation and rising wages—will be spending their savings on gifts for friends and family, if estimates from the National Retail Federation (NRF) are accurate.

According to the retail trade association, as many as 137.4 million consumers planned to shop this Thanksgiving weekend, nearly a whopping 60 percent of Americans. This figure is up from last year's 135.8 million people. This includes both in-store shopping as well as online shopping, which, as you might have noticed, is becoming a huge deal.

Black Friday remains the busiest shopping day, with 74 percent of consumers telling the NRF they planned to venture out into the crowds to take advantage of gotta-have-it bargains.

But e-commerce is quickly catching up, with the internet-only Cyber Monday second in sales to Black Friday. For the first time this holiday season, online purchases are expected to account for more than 10 percent of all retail sales, according to consumer research firm eMarketer. “Online sales,” reports Bloomberg, “are likely to climb to $94.7 billion, representing almost 11 percent of total sales in November and December, an all-time high.”

E-commerce is set to account for a record share of retails sales this holiday season
click to enlarge

The growing popularity of online shopping has prompted more and more brick-and-mortar retailers to push their e-commerce sales earlier to Black Friday and even Thanksgiving Day. In years past, retailers waited until Cyber Monday to post digital discounts, but today they risk losing market share among shoppers who increasingly prefer making purchases off their laptop and smartphone.

One of these retailers is Walmart, which will start offering online sales two days in advance, in a bid to stay ahead of competitor Amazon.  In a press release, the Arkansas-based behemoth announced it has tripled its assortment of online products, from 8 million last year to more than 23 million today.

Another Record Year for Packages Delivered

The rise in e-commerce has had the inevitable effect of giving more business to ground and air delivery companies such as FedEx and United Parcel Service (UPS). It’s expected that, with online sales jumping 17 percent this year, the number of packages handled and shipped will jump to a record high.

According to Business Insider, UPS—the world’s largest delivery company—projects it will ship a record-setting 700 million packages between Thanksgiving and Christmas, or 70 million more than the same time last year. FedEx hopes it can ship 10 percent more than the 325 million it delivered last year.

Meanwhile, Amazon’s plans to establish its own in-house transportation network have hit a setback. About 250 pilots contracted with Amazon partners Air Transport Service Group and Atlas Air Worldwide Holdings went on strike Tuesday over a “longstanding labor dispute.” The Jeff Bezos-run retailer has been determined to deliver its own products after bad weather in 2013 delayed millions of Christmas deliveries, but it appears these efforts are off to a rough start.

Wishing You Health, Wealth and Happiness!

I wish to conclude by giving thanks to our loyal Investor Alert readers as well as investors. Visit us on Facebook or Twitter and let us know what you’re thankful for this season!      

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 9/30/2016: United Parcel Service Inc.

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Surprise! Buffett Books a Flight on Airline Stocks
November 21, 2016

warren buffett bets big on airlines

It’s never too late to change your mind.

After years of deriding the airline industry, Warren Buffett confirmed last week that his holding company, Berkshire Hathaway, has invested nearly $1.3 billion in four big-name domestic carriers: American, Delta, United and Southwest.

Domestic Airlines Surge Buffett Investment News
click to enlarge

The stake is a dramatic reversal for the 86-year-old investing wizard, who previously called the industry a capital “death trap” and once joked that investors would have been served well had Orville Wright’s plane been shot down at Kitty Hawk.

The thing is, Buffett held these opinions long before airlines began making the fundamental changes that would flip their fortunes from bankruptcy to record profitability. When Buffett first tried his hand at making money in the aviation industry in 1989, airlines were still struggling in a fiercely competitive marketplace. Many carriers called it quits, including President-elect Donald Trump’s Trump Shuttle, which ceased operations in 1992. Others spent years in bankruptcy court.

But following the massive wave of industry consolidation between 2005 and 2010, a new business environment emerged, one characterized by disciplined capacity growth, new sources of revenue, greater efficiency and a commitment to repairing balance sheets. I’ve written about these changes for the past 18 months, all of which are summarized in this brief five-minute video.

2 million people fly us every day

Buffett also likes airlines now for the same reason he’s long been a fan of railroads—namely, the barriers to entry are extremely high if not entirely impenetrable to new competitors. This is the “moat” Buffett refers to when talking about rail.

As a value investor, he prefers inexpensive stocks, and among industrials, airlines are cheapest of all, based on price-to-earnings and cash flow.

Airlines Least Expensive Among Industrials
click to enlarge

Buffett’s bullish rotation into airlines was followed by news last week that Citi also made fresh buys of Southwest, Delta, American and Allegiant shares, on the “broad theme that sector consolidation and an improved economy will reap benefits,” according to Seeking Alpha’s Clark Shultz.

Challenges still remain, of course, but domestic airlines today are profit-making, dividend-paying machines. In the first nine months of 2016, the top nine U.S. carriers—Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United—reported combined net income of $18.3 billion. That’s quite an improvement from the $11.2 billion they pocketed for the entire year in 2014.

Domestic airlines 11 billion shareholders nine month 2016

Over the same nine-month period, airlines returned $11.4 billion to shareholders via stock buybacks ($10.5 billion) and dividends ($912 million), according to industry trade group Airlines for America (A4A).

Here’s Why Blue Skies Could Last

In the near-term and long-term, airlines continue to look very attractive. Air travel demand is rising as incomes grow and the size of the global middle class expands.

This Thanksgiving week, more than 27 million passengers are expected to fly on U.S. airlines, an increase of 2.5 percent over the previous year, according to A4A. Much of the demand is being driven by affordable airfare, which is at its lowest in seven years.

The picture looks just as optimistic further down the road. The International Air Transport Association (IATA) sees global passenger demand nearly doubling over the next 20 years. The group expects 7.2 billion people to fly in 2035, up dramatically from 3.8 billion last year.

chinas middle class overtakes us

The Asia-Pacific region should be the biggest demand driver, with China displacing the U.S. as the world’s largest aviation market. As I’ve written about before, the U.S. and China both agreed to extend visas for business travelers, tourists and students, which has already led to increased travel between the two nations. When I last visited the New York Stock Exchange recently, I noticed that half of the tourists appeared to be from China.

What Effect Might President Trump Have on Airlines?

In the week following the presidential election, we saw modest gains in several sectors, including airlines. Evercore ISI’s proprietary Company Surveys, designed to monitor the economy on a weekly basis, showed a post-election bounce, rising 1.1 points to 49.6.

steady improvement week following election
click to enlarge

In many more ways than one, Donald Trump is unlike any other person ever to occupy the White House, bringing with him a unique set of skills and experiences that no other president can claim. As I mentioned earlier, he will become the first U.S. president who was formerly an airline executive. He also boasts an extensive background in tourism and hospitality, having built and managed everything from hotels to resorts to golf courses

Donald Trump first US president airline executive

Industry leaders, therefore, hope Trump will prove to be a powerful ally and take their side on several key issues. For starters, many are encouraged that the president-elect has proposed as much as $1 trillion in infrastructure spending on “our highways, bridges, tunnels, airports, schools, hospitals,” as he announced the day following last week’s election.

Trump has also promised to swing the pendulum away from monetary policy toward fiscal policy—cutting taxes and relaxing regulations—which has put Federal Reserve Chair Janet Yellen on the defensive. On Friday, she defended the Dodd-Frank Act, which Trump has vowed to dismantle, stating a repeal would increase the likelihood of another financial crisis.

As for the aviation industry, U.S. carriers have been pushing Congress for years to reform air traffic control so that the steering wheel is in the hands not of the Federal Aviation Administration (FAA) but a private, not-for-profit entity. Canada made a similar transition in 1996 when it turned authority of its civil air navigation service over to the privately-run Nav Canada, which today manages approximately 12 million aircraft movements a year.

The industry would also like to see open talks with several state-owned Middle Eastern carriers, whose governments provide tens of billions of dollars in “unfair” subsidies every year.

Jill Zuckman, chief spokesperson for Partnership for Open & Fair Skies, an airline lobby group, has urged Trump, a harsh critic of international trade agreements, to protect the interests of American airlines and workers.

“The Gulf carrier subsidies threaten the jobs of 300,000 U.S. aviation workers and the American aviation industry as a whole,” Zuckman alleged, “and we are optimistic that the Trump administration will stand up to the United Arab Emirates and Qatar, enforce our trade agreements and fight for American jobs.”

Other leaders see headwinds in some of Trump’s more isolationist and nativist rhetoric, particularly his tough stance on immigration from Mexico—currently the number two market for travel and tourism to the U.S.—and Arabic-speaking countries.

Arrivals into the U.S. by Country, 2013
Rank Country Number of Visitors,
in Millions
Percent Share
#1
Canada Flag
Canada
23.39 33.5%
#2
Mexico Flag
Mexico
14.34 20.6%
#3
UK Flag
United Kingdom
3.84 5.5%
#4
Japan Flag
Japan
3.73 5.3%
#5
Brazil Flag
Brazil
2.06 3.0%
#6
Germany Flag
Germany
1.92 2.7%
#7
China Flag
China
1.81 2.6%
#8
France Flag
France
1.50 2.2%
#9
South Korea Flag
South Korea
1.36 1.9%
#10
Australia Flag
Australia
1.21 1.7%

According to the Council on Foreign Relations, a travel ban on Muslims entering the U.S.—a controversial proposal Trump has since softened—could cost the U.S. economy as much as $71 billion a year and up to 132,000 American jobs. As The Economist pointed out in a recent article, travelers from the Middle East tend to be big spenders, shelling out 50 percent more per trip than Europeans on average.

Trump has also expressed interest in reversing current diplomatic relations with Cuba, favoring a reinstatement of old travel and trade embargos. (“The people of Cuba have struggled too long,” he tweeted in October. “Will reverse Obama’s Executive Orders and concessions towards Cuba until freedoms are restored.”) Many U.S. airlines have already begun scheduled flights to Havana, including United, American and Southwest, with others soon to follow (JetBlue, Alaska, Delta and Spirit, among others).

As for whom Trump might name as head of the Transportation Department—which oversees the FAA, Federal Highway Administration, Federal Railroad Administration and other agencies—rumors are circulating that it’s come down to either Rep. John Mica (R-Fla.), former House Transportation Committee chairman; or James Simpson, former commissioner of New Jersey’s Department of Transportation.

The airline industry has proven itself resilient time and again, emerging stronger from a decade ago. For investors, the group is relatively inexpensive and generous with its dividends and stock buybacks. Changes might very well be in the cards, but I remain bullish on airlines, just as Warren Buffett is.

 

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity.

The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 9/30/2016: American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc., Southwest Airlines Co., Allegiant Travel Co., Alaska Air Group Inc., Hawaiian Holdings Inc., JetBlue Airways Corp., Spirit Airlines Inc. 

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Net Asset Value
as of 01/13/2017

Global Resources Fund PSPFX $5.54 0.03 Gold and Precious Metals Fund USERX $7.85 0.06 World Precious Minerals Fund UNWPX $6.95 0.14 China Region Fund USCOX $7.62 0.02 Emerging Europe Fund EUROX $6.00 -0.01 All American Equity Fund GBTFX $23.72 0.03 Holmes Macro Trends Fund MEGAX $18.77 0.08 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change