Bill Miller: Betting on a Rebound If you aren't familiar with Bill Miller, here is what you should know: He is the only fund manager in history to have outperformed the S&P 500 for at least 15 years in a row. Miller achieved that feat, then known as "the streak," from 1991 through 2006 while running money for Legg Mason. It was an incredible accomplishment. At a recent investor roundtable organized by Ariel Investments, Miller pounded the table on why shares of airline operators are major bargains today. I checked the holdings of his fund, Miller Opportunity Trust, and can verify that he has 10% of his portfolio invested in the sector as of April 30. So he is putting his money where his mouth is... While speaking at the Ariel Investments roundtable, Miller explained his interest in owning the airlines as follows... People love flying and don't worry about catching polio or smallpox since there is a vaccine. If you don't own the airlines, then you're making a bet against the vaccine... If there is a vaccine that will eliminate all the issues people have about flying... these (stocks) will come back very, very quickly. Plus, all the bad news is already priced into these stocks. That is a very bullish case. Warren Buffett: Throwing in the Towel Bill Miller is a very accomplished investor, but Warren Buffett is the most accomplished investor, even at age 89. His view of the market and individual stocks is watched more closely than anyone else's. On May 2, Buffett held his annual Berkshire Hathaway (NYSE: BRK-B) shareholder meeting. There weren't tens of thousands of patrons packed into an arena for the Berkshire meeting this time. Instead, it was held online. Just Buffett taking questions and doling out wisdom via a video conference... It was in this meeting that Buffett revealed that in April, he had completely sold all of Berkshire's airline stock holdings. These were investments that he had held for several years. To be clear, he sold the airlines after the share prices of these companies had collapsed. It's estimated that he took around $3 billion in losses on those positions. Clearly, he soured quickly on these businesses. In the meeting, he attributed that big change of heart to what he believes will be lasting implications from the pandemic. Buffett explained, "I don't know that three, four years from now people will fly as many passenger miles as they did last year... That means that you've now got too many planes." Clearly Buffett isn't as bullish about a vaccine being an immediate cure to airlines' problems. Who Is Right - Buffett or Miller? I don't believe that airline stocks are a clear bargain today. While share prices are down, earnings are down even more. If earnings were certain to rebound, then I'd be more interested. But I don't think earnings are certain to rebound for a long time, and certainly not on a per share basis. Thinking about the airlines on a per share basis is important because the share counts of these companies have increased in recent weeks. Take United Airlines (Nasdaq: UAL), for example. The company just raised $1 billion of cash by issuing more than 40 million shares at $26.50 per share. Considering United Airlines traded for almost $100 per share not that long ago, issuing 40 million shares at these prices and increasing the total share count by 20% is hugely dilutive to shareholders. Now, even if earnings for United went back up to 2019 levels tomorrow, on a per share basis they will have decreased because of the higher share count. The other airlines have been doing the same thing - issuing equity at rock-bottom share prices. They have also been taking on more debt to help support operations, which puts them in even weaker financial positions. Further, even the assistance from the federal government under the CARES (Coronavirus Aid, Relief and Economic Security) Act includes warrants that will further dilute shareholders. I'm not saying that raising this cash is wrong. It is what the airlines need to do to survive this difficult stretch where they are burning cash every day. But this difficult stretch has a lot further to run, which means that even more dilution is coming. I believe there are better places to put your money today than in airlines, and I intend to show you where. Stay tuned... Good investing, Jody | 
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