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Should You BUY Airline Stocks After Warren Buffett SOLD?! (Airline Stock Ranking) - YouTube
Channel: Nick Peitsch Investing
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Warren Buffett just sold off large portions
of his positions in both Delta Airlines and
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Southwest Airlines, which honestly came as
a huge surprise to the media!
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In total, Berkshire Hathaway ended up selling
nearly 13 million shares of Delta Airlines,
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equating to over $300 million in value, and
then 2.3 million shares of Southwest airlines,
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which ended up being over $70 million in value.
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Now this news came after Buffett stated in
an earlier interview that he was not going
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to be selling any positions due to the current
market conditions - but clearly, he has changed
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his mind and the market is reacting negatively.
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Taking a look at the after hours stock price
performance of these companies that he just
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sold off, Delta Airlines is down over 11%
after hours, and then Southwest Airlines down
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over 5%.
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But not even just these 2 companies are down,
Buffett's move basically impacted all other
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airliners in the industry because it appears
that Buffett is losing confidence in the industry
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as a whole.
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Now in this video, I'm not going to be speculating
on all of the reasons why I think that Buffett
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sold these two positions, but I do think that
a huge motivator behind his decision was because
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of the recent bailout package that was announced
by the U.S. government.
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With the CEO of Delta explicitly saying that
they're burning through over $60 million in
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cash every single day, a bailout will essentially
be necessary for a lot of these larger airliners.
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So Delta along with many of the other airliners
in the industry have already put in their
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applications to the government to receive
some of this relief money, but as investors,
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we need to know what exactly does this bailout
entail?
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Well the government stated that its going
to offering $50 billion in tax payer relief
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money to these airlines, where half of it
is going to be considered grants, or cash
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from the government, and then the other half
will be loans to be repaid at a later date.
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But what investors need to know about this
bailout is that the government is expecting
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to receive, and as I quote "appropriate compensation"
in exchange for this bailout money, which
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could be in the form of stock in these companies,
and that would end up diluting a lot of the
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other shareholders.
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And some of the other conditions of this bailout
are really not that appetizing for the companies,
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like they're not allowed to lay off any staff
until September 30th of 2020, and then after
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that point, they can only lay off up to 10%.
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Furthermore, the companies will not be able
to do any stock buybacks or pay any dividends
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until September 2021, so that's basically
over a year away and that would definitely
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impact shareholder returns.
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Now with the bailout package, I would say
that it's highly unlikely that a lot of these
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larger airliners will go bankrupt, and that's
probably not the reason why Warren Buffett
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sold in the first place.
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But as a value investor, Warren Buffett probably
sees the returns of Delta and Southwest Airlines
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not being adequate compared to other companies
that he could otherwise be investing in.
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So what I'm saying is that there's an opportunity
cost associated with holding these airline
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companies in the short term, being over the
next 3-5 years likely, if they cannot recover
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as quickly as some other great and undervalued
businesses.
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So then the question becomes, should you buy
into airline stocks after Warren Buffett sold
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off much of his positions in Delta and Southwest?
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Well in my personal opinion, it really depends
on the airline that you want to be buying
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into, and that's what we're going to be investigating
in this video.
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I'll be digging into the balance sheets of
many of the largest airliners in North America
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and then ranking these companies in terms
of their balance sheets.
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And hopefully, that should help you determine
which companies are the safest bets right
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now for the best risk reward profile.
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So if you do enjoy this video, make sure to
hit that like button down below to support
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my channel, it really helps me out.
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And then if you haven't already, definitely
consider subscribing down below for more weekly
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investing videos just like this!
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And with that said, let's jump right into
these airline stocks.
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Alright so in a time like this, where businesses
are shutting down and airlines really aren't
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doing any flights, except for the essential
ones as determined by the government, what
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investors need to be doing is looking at the
balance sheets of these companies.
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We shouldn't really be paying much attention
at all to the income statement because earnings
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have changed dramatically over the past few
months.
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And guys, even if all of these companies are
set to survive because of a bailout, it's
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very important to still look at the balance
sheets to see which companies are able to
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self-sustain the most.
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Because, as we all know, these bailout packages
really have a lot of strings attached and
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don't benefit investors to the full extent
- other than the companies surviving through
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this economic period.
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So what I'll be doing is investigating and
ranking the balance sheets of some of the
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top 5 airliners over here in North America,
and those would include Southwest Airlines,
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American Airlines, Delta Airlines, United
Airlines, and then Air Canada.
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So first of all, I want to start off with
Delta Airlines, which is the largest airline
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position that Warren Buffett cut out of his
Berkshire Hathaway stake.
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Now taking a look at this company's balance
sheet, the first thing that we want to look
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at is current assets section, and that includes
their cash amount of $2.9 billion.
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So with that being said, their total current
assets ends up being $8.2 billion, and now
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it's time to take a look at their current
liabilities.
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Now what's really scary here for any investor
out there is that this company has current
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liabilities of nearly $20 billion.
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And although 40% of that number is their deferred
revenues, which is essentially the pre-booked
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flights that they actually haven't done yet,
it's still a scary number and it shows a lot
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of debt on this company's balance sheet.
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So in order to rank Delta amongst many of
its peers, I'm going to calculate the current
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ratio, which is just your current assets divided
by your current liabilities, and that ends
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up being 0.41 for Delta.
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But I'm also going to be comparing these companies
based on the total cash to current liabilities
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ratio, which essentially shows how much cash
they have available to pay off all of those
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liabilities, and for Delta, that's sitting
at 0.14.
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Now moving on to American Airlines, which
is the biggest airliner in the U.S.
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They have cash of $280 million and then current
assets of $8.2 billion.
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So right here, we can see that this company
really has a very low amount of cash.
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Now we also find that this company does have
a lot of marketable securities in their cash
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section, but I personally don't want to take
that into account right now in terms of their
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cash because this number was reported in December
2019, and since the stock market has dropped
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significantly since then, this amount would
likely be a lot lower than what is reported
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right there.
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Now on the flip side, this company does have
$18.3 billion in current liabilities, which
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is obviously a lot higher than their current
assets, and then of which, they have $8 billion
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in deferred revenues, which are those pre-booked
flights that may or may not go through.
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So tallying up their current ratio, which
is again their current assets to current liabilities,
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it comes out to be 0.45 for American Airlines.
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And then their total cash to current liabilities
ratio ends up being 0.21.
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Now at this point, we're seeing that American
Airlines is looking slightly better than Delta
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because their current ratio is a little bit
higher, as well as their total cash to current
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liabilities, but it should be noted that their
cash amount does include those marketable
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securities, so I'm not sure if I would totally
trust it all.
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Alright now moving onto United Airlines, which
is obviously another huge airliner out there
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in the U.S., and this company has current
assets of $8.2 billion and then cash of $2.8
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billion.
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And what we see from this is that their current
cash levels relative to their current assets
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is a lot higher than American Airlines, and
it's about the same as Delta so this company
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is looking a little bit better than American
right now.
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Now taking a look at the liabilities section
on United Airlines balance sheet, we find
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that they have current liabilities of $14.9
billion, and then of which, their deferred
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revenues are $7.3 billion.
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So because United has a lot less in terms
of their current liabilities when compared
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to Delta and American Airlines, this actually
gives them a higher current ratio, which is
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their current assets to current liabilities,
and that is 0.55.
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And on top of that, we do find that their
total cash to current liabilities ratio is
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the highest of the bunch being at 0.33.
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So now moving on to Southwest Airlines, which
is one of the companies that Warren Buffett
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chose to trim his position in, and they have
current assets of $6 billion, which is the
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lowest of the bunch.
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However, we do find that they have a similar
amount of cash to Delta and United Airlines,
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being at about $2.5 billion right now, and
that is a very good ratio when compared to
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their current assets.
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On top of that, we find this company has the
lowest amount of current liabilities, being
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at $9 billion only.
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And then we also find that about 50% of those
current liabilities are sitting in terms of
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deferred revenues, and so the higher amount
of deferred revenues relative to your current
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liabilities is generally better.
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So this ends up giving Southwest Airlines
a current ratio of 0.67 and then a total cash
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to current liabilities ratio of 0.45, which
is actually the best of the bunch so far.
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Alright, now the final airline that we're
going to be talking about today is one in
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my home country Canada, that being Air Canada.
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And I wanted to talk about this one to compare
Canada versus the U.S. in terms of how the
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airliners might be doing.
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So getting straight into their balance sheet,
we find that Air Canada has current assets
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of $7.5 billion and then their cash amount
is sitting at $2.1 billion.
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And then looking at the liabilities section
of their balance sheet, we find that their
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current liabilities are sitting at $7.8 billion,
and then of which, their deferred revenues
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are over 50% of those current liabilities
sitting at $4.1 billion.
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Now when we calculate their current ratio,
this ends up being 0.97 and this essentially
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means that the company nearly has the same
amount of current assets to their current
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liabilities.
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Finally, calculating their total cash to current
liabilities ratio, this ends up being 0.76,
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which is the best in the industry compared
to all of the companies that I've talked about.
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Alright guys, so to sum everything up, I ranked
all of these companies in terms of their current
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ratio and then their total cash to current
liabilities ratio, because these are the two
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ratios that are very important when you're
looking at a company's balance sheet and if
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they're going to survive through a recession.
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And you've probably noticed by now, but I've
intentionally ranked these companies from
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worst to best with Delta Airlines being the
worst in terms of those ratios and then Air
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Canada being the best of the bunch.
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But in terms of the best U.S. Airliner, it
would have to be Southwest Airlines because
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of their low amount of debt on their balance
sheet.
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Now this probably explains why Warren Buffett
wanted to sell so much of Delta being over
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$300 million of his stake in the company compared
to only a little bit of Southwest, being only
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$70 million.
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And I honestly don't blame him because when
you see these current ratios below 1, it's
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showing that these companies are not able
to survive a single year based on the current
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assets in their balance sheet.
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And that's why so many of these companies
are applying for the bailout money because
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simply they don't have enough current assets
to cover those current liabilities.
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So that leaves us with the question, should
you buy into airline stocks after Warren Buffett
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liquidated his positions?
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In my personal opinion, I would only buy into
Air Canada stock because this is first of
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all the company that I'm most familiar with
having lived in Canada my entire life.
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But with their current ratio being the highest
of the bunch at nearly 1 and then their total
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cash to current liabilities also being the
highest, I think that they have the best chances
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of survival and profiting after this circumstance.
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And from my knowledge, even though nothing
has been announced about a bailout for the
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airliners in Canada, I really don't think
that Air Canada would be going away anytime
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soon because they are such a critical component
to our economy.
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Now in terms of the U.S. companies, I probably
wouldn't buy into any of those.
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Although, Southwest is the best of the bunch
and if I were to, it would probably have to
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be Southwest.
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After seeing that Warren Buffett sold off
part of his positions in both Southwest and
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Delta, it really does worry me and I would
have to do a lot more research into the companies
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if I did plan on buying them.
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Not only that, but if you are an investor
looking into buying into these airline companies,
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I think it's very important to fully understand
the bailout terms and conditions.
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There will likely be separate agreements for
each one of these companies, so that will
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be coming in the near future here, so we really
don't know at this point how much benefit
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the U.S. government could be getting out of
bailing these companies out.
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So hopefully, that gives you guys some insight
into my thoughts on these companies and which
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one is going to be the best one to buy.
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But as I always say, make sure to do your
own research because I'm not a financial advisor
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and I don't want you blindly picking my stocks
just because I talked about them.
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So anyways, with that said, thank you so much
for watching the video, I really do appreciate
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it.
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Let me know down below what you guys think
about airline stocks and if you're going to
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be buying them after this bailout package
just came out.
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And if you did enjoy this video, make sure
to tap that like button down below to support
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my channel, and then if you haven't already,
consider subscribing for more weekly videos
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on personal finance, business, and investing
in the near future.
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And I will see you in the next one!
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