“Be fearful when others are greedy and greedy when others are fearful“.-Warren Buffet, Oracle of Omaha
While many retail investors are panicking seeing their investments lose value, some billionaires see the current downturn as an opportunity to buy stocks at considerably discounted prices.
Here are the 5 stocks that Warren Buffet, Mark Cuban and Carl Icahn recently purchased.
DELTA AIRLINES (NYSE: DAL)
Evidently, Warren Buffet is putting his mammoth cash reserves to good use.
In February, The Oracle of Omaha purchased 970,000 shares of Delta Airlines for a little over $45 million, increasing his take in the company to more than 11%.
Judging from its income statement, DAL is a growing and quite profitable business:
- Revenues are increasing every year, indicating growth
- Net Income is consistently positive, indicating good cost control
- 2019 EBITDA of $9 billion is high, indicating good margins:
- 2019 Gross Margin is 22% which is good for an airline
- 2019 Net Margin is 10% which is very good for an airline
When it comes to debt, Warren Buffet likes to invest in businesses who have Current Ratios superior to 1.5 and Debt to Equity Ratios inferior to 0.5. Does DAL meet this criteria?
- The Current Ratio is 0.40 which is very poor.
- The Debt to Equity Ratio is 3.20 which is very poor.
These debt ratios indicate that DAL is a highly leveraged business: Indeed, it has $8.8 billion in long term debt.
However, despite having significant debt, DAL has EBITDA of $9 billion and Free Cash Flow of $3.5 billion. This means that the company has sufficient cash to pay off part of its debt if it needed to.
Last but not least, DAL has an attractive annual dividend of $1.61 per share currently yielding 7.25%. DAL has increased its dividend for the past 6 years at a 5-year rate of 38%. Not bad.
Why is Buffet investing in an airline with such a massive debt burden? The answer is probably more complex than the explanation I will provide but here is my take on it:
- First, he must see low fuel prices as a positive development that will decrease airlines’ costs in the coming months (and maybe years). Airlines hedge the risk of increasing fuel costs by purchasing forward contracts, which allows them to purchase oil in the future at a predetermined price. Buffet is betting that cheap fuel will boost the airline’s profitability.
- Second, he must be convinced that DAL’s earnings point to a growing business and that its EBITDA provides a margin of safety offsetting its debt burden. His growing involvement as a major shareholder will put pressure on the company to manage its debt well and focus in increasing shareholder value.
- Third, he has always loved airlines and probably sees the current prices as great dollar-cost averaging opportunities. DAL is one of the leading airlines and the current valuation is extremely cheap. He kills two birds with one stone by increasing his stake in the company at a discount and setting himself up for future capital gains.
- Fourth, as an insider he must be privy to the bailout talks and obtained guarantees that DAL could receive bailout money. If they do, they can mitigate their recent coronavirus losses and focus on growing the company at the expense of higher leveraged companies who won’t have as much liquidity to invest.
- Fifth, he may believe that other airlines will suffer greatly from the coronavirus crisis, maybe even go bankrupt, and he is increasing his stake in a company that may reinforce its position as a market leader.
- Sixth, he must like the current dividend yield of 7.25% and the 5-year dividend growth rate of 38%.
VERDICT: BUY IF YOU HAVE MODERATE RISK TOLERANCE.
TWITTER (NYSE: TWTR)
Looking at the financials, I can understand why Cuban likes in Twitter: it is a growing and financially healthy company. Since 2016, Revenues, Net Income and EBITDA are all increasing.
Twitter’s low debt burden is also quite attractive: its Current Ratio of 9.15 is exceptional and its Debt to Equity Ratio of 0.45 is good.
Lastly, I like Twitter’s Free Cash Flow. $762 million of FCF and little debt means the company has significant funds to invest in future growth.
LIVE NATION (NYSE: LYV)
Compare to Twitter, Cuban’s investment in Live nation appears riskier.
The main positive:
- Revenues are increasing steadily since 2016
- Net income is positive since 2018 which suggests the company is controlling its costs and
- EBITDA is increasing since 2016.
However, the good news stops there: The company’s $3.2 billion of long-term debt is not exactly enticing and not covered by its $786m EBITDA. This means that if revenues dry up it could rapidly face financial difficulties.
The company’s debt is not well covered by its assets:
- Current Ratio of 1.02 is poor. This indicates the company’s short term assets can barely cover its short term liabilities.
- Debt to Equity Ratio of 8.3 is abysmal. The company’s total assets are nowhere near sufficient to cover its total liabilities.
The bad news doesn’t stop there as LYV’s 2019 Free Cash Flow decreased 84% from 2018 and is down 75% since 2016.
VERDICT: DON’T BUY UNLESS YOU HAVE HIGH RISK TOLERANCE.
HERTZ (NYSE: HTZ)
Icahn has been buying shares of Hertz for six years and now owns almost 40% of the company.
At first glance, the company’s Balance Sheet displays some positives:
- Revenues are increasing steadily since 2016
- EBITDA is increasing steadily since 2016
However, despite revenue and EBITDA growth suggesting the company is heading in the right direction, its income statement reveals a major negative, namely that Cost of Revenue is very high, which negatively impacts margins and profitability:
- 2019 Gross Margin is 17% which is very low.
- 2019 Net Margin is -0.59% which is horrible.
How can the company sustain negative margins? By being highly leveraged.
Indeed, HTZ has a serious debt problem: the Debt to Equity Ratio is 12.85, which is very poor.
The company has long-term debts of $17 billion dollars which are not covered by earnings.
That’s not even the worst part: The long term debt has actually increased by 28.5% since 2016.
Unsurprisingly, HTZ’s Free Cash Flow is also abysmal: In 2019, the cash flow is negative $11 billion. The worse part is that this figure is increasing, with free cash flow decreasing 28.9% since 2016.
In sum, this purchase appears to be part of Icahn’s long-term strategy of increasing his participation to try and turn the company’s fortunes around. Although he has made decent progress, there is still a very long way to go before this company becomes an attractive purchase.
VERDICT: DON’T BUY.
NEWELL BRANDS (NASDAQ: NWL)
With his recent purchase, Icahn now owns more than 10% of consumer goods company Newell Brands.
As with HTZ, the company’s results are not exactly exciting:
- Revenues have fallen by 63% since 2016
- Net income is volatile and down 79.8% since 2016
- EBITDA is down 24.8% since 2016
If declining revenues weren’t worrying enough, NWL has long term debts exceeding $5 billion:
- Current Ratio is 1.38 which is average.
- Debt to Equity Ratio is 2.14 which is poor.
However, it must be noted that the company is doing a decent job of reducing its liabilities, with the long-term debt decreasing 52% since 2016. However, this is offset by a 53% decrease in total assets over the same period.
Summing up the company’s misery is total stockholder equity which is down 56% since 2016, falling from $11 billion to just under $5 billion.
While NWL’s 2019 Free Cash Flow is a seemingly encouraging $779 million, this figure is actually down 43% from 2016 when it stood at $1.3 billion.
Data suggests that the company is doing a very poor job of managing its assets. Thus, the company needs to improve its profitability (margins) and returns:
- The 5-year average annual Gross Margin of 35% is reasonable but on the low end of the scale for the consumer goods industry but reasonable cost controls could make it work.
- However, the 5-year average annual Net Profit Margin of -6.6% is abysmal. The company’s needs to control its costs to maintain a steady margin.
- Return on Equity of -18.46% is abysmal
- Return on Assets of -5% is abysmal
- Return on Investment of -7.5% is abysmal
NWL pays an annual dividend of $0.92 per share, which represents an 8.72% at current prices. The company has a payout ratio of 62% which is considered high. Given the company’s structural decline, perhaps they should lower the payout ratio to focus on growth-generating investments.
The dividend yield of nearly 9% is an all-time high but investors shouldn’t be fooled into thinking that this represents great value for money.
As you can see on the chart below, NWL has already cut its dividend twice, once in 2009 and again in 2010. Dividends have been increasing since then but what’s to say the company won’t slash the dividend again given the losses incurred by the coronavirus crisis?
If they’ve cut the dividend during harsh economic times before, they may well do it again.
VERDICT: DON’T BUY.
Billionaires buy stocks for plethora of reasons:
- To increase their stake in a company in order to exert more influence,
- To earn dividends
- To make capital gains
- As speculative gambles
- All of the above
You should never seek to mirror their investments because you don’t know their exact rationale for purchasing the stocks they buy. However, you can analyze the companies they are buying to decide if they are good investments for you or if you believe in their ability to turn the company’s fortunes around. In any case, you should always perform due diligence before investing in any asset.
Due diligence is investment intelligence.
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DISCLAIMER: This is not financial advice. Do your own research before investing in any asset.