All value investors should pause for a moment and consider an investment in the airline industry. JetBlue Airways (JBLU) has done an outstanding job of building a niche franchise in a miserable industry. Very few investors seem to understand the unique franchise that JBLU has built. Selling for less than a pretty clean book value, and with a balance sheet that is better than it appears, I believe JBLU is a stock that value investors should own.
After a brief review of my sanity, I will explain some of JBLU’s unique characteristics, review its current valuation, and discuss a few miscellaneous topics.
THE WORLD’S WORST INDUSTRY
“It just might be a lunatic you’re looking for” – Billy Joel
Let’s answer the most important question first. Would any sane person invest in the airline industry?
-the big airlines have lost roughly $55 billion in the last ten years
-all the big airlines (except for Southwest Air (LUV)) have gone through bankruptcy
-Warren Buffett said, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” – Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.
As a generalist value analyst for the last 30 years I must admit I seldom wasted a minute looking at this industry. Even though many of the stocks were often statistically very cheap, other than an occasional glance at LUV, I always had better things to do.
What changed? In a desperate search for new ideas, I reviewed the portfolios of professional investors who I have great respect for. One whom I particularly admire is Donald Smith & Co. This firm manages over $3 billion in institutional money using a strict discipline of investing in only the bottom 10% of price/book value stocks. Looking at their portfolio, I think they really understand this unique universe. Smith & Co. has owned JBLU since 2008, and they are now the largest shareholder with just over 10%.
It is also worth noting that the guys at PRIMECAP Management own 8% of JBLU and 11% of LUV. These guys are too growth oriented for me; they own things like Google and Amgen. Even the well respected John Hussman started a small position in the last quarter.
Have these apparently smart investors all gone mad? When I spent some time looking at JBLU, I must admit I was surprised by what I found.
The complete article can be found here on Seeking Alpha.
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