Clearing the Air on Some Fatherly Advice
Friday, May 08, 2020
I had a few emails this morning highlighting Tom Bradley’s blog post, Air Canada - A contrarian's dream or nightmare?
In the post, Tom shared that my late father, Murray Leith Sr., told him that he only bought highly cyclical stocks like airlines "when they were losing gobs of money and everyone hated them."
The funny thing is, I got very different advice from my father – “If you ever find yourself thinking about buying an airline, crawl under a table until the feeling goes away!” Tom knew my father earlier in his career, and I suspect my dad had had a few scares from poorly timed airline trades by the time he shared his thoughts with me.
In any event, the advice I received created a bias in me that has held firm throughout my career; I’ve never owned an airline. I’ve owned plenty of other tough, highly cyclical businesses, but never an airline.
I was getting close, however, and was warming up to the idea prior to the pandemic. Industry consolidation, improved service, finite airport capacity, rising demand and technology had rendered the industry considerably more profitable. We were trying to understand the cyclical risks and get comfortable with valuations when COVID-19 descended on the world.
Whew, we got lucky! I think I will go crawl back under a table.
While it might be tempting to buy deeply depressed stocks, we are reluctant to buy cyclical companies with huge operating and/or financial leverage. There is a risk of permanent loss of capital given the extremely wide range of economic possibilities over the next few years.
Airline stocks could remain grounded if demand for air travel is slow to recover. On the other hand, they may take off if the economic skies brighten sooner rather than later. Regardless of what the stocks do, we see attractive deals and great service on the horizon for travelers awaiting a return to a safer environment.