Warren Buffett likes to buy beaten-down stocks when the rest of the market is selling.
He’s also been buying airline stocks recently. That suggests that the Oracle of Omaha would be interested in Ryanair (LSE: RYA) and International Consolidated Airlines (LSE: IAG) after recent declines if he was looking at UK shares.
But there’s more to his strategy than just buying cheap stocks.
Warren Buffett’s investing mentality
Warren Buffett has been buying airline stocks over the past few years. However last week, the investor sold some of these holdings.
As of yet, we don’t know why he decided to sell. Nevertheless, it does suggest that he might have changed his opinion on these businesses.
The investor likes to buy companies that have a robust business model and competitive advantage.
Both IAG and Ryanair had these advantages before the recent coronavirus outbreak. Now that both companies have had their fleets grounded, these advantages have disappeared.
What’s more, at this stage, it’s impossible to tell when these companies will be able to resume flying again. That means it’s almost impossible to value Ryanair and IAG right now.
Warren Buffett doesn’t like gambling.
Unfortunately, right now, it looks as if investing in both of these companies is akin to gambling. While it’s highly likely that both Ryanair and IAG will be able to resume flying in the near term, until we know exactly when they can start operating again, we don’t know if they have enough capital to weather the storm.
Warren Buffett will only invest in an opportunity if he can be sure that the business will be around in five or 10 years’ time. That’s something most analysts just can’t say with any confidence right now.
So, it seems unlikely that Warren Buffett would buy Ryanair and IAG after recent declines.
That’s not to say that both companies are unsuitable investments right now. Both of these airlines have achieved fantastic results for their investors over the past 10 years.
It seems highly likely they will continue to earn healthy returns on capital when they resume operations again.
Both companies have also said that they have enough money to weather the storm for at least 12 months. That might not be good enough for Warren Buffett, but if you think the economy will be back up and running before the end of 2020, then it could be worth taking a closer look at these stocks.
IAG appears to offer the most value at current levels. Shares in IAG are currently dealing at a price-to-book (P/B) ratio of 0.75. That suggests that the stock offers a wide margin of safety at current levels.
Ryanair is a bit more expensive. Shares in the budget carrier are dealing at a P/B ratio of 1.5.
As such, IAG might be the best bet right now considering its stable of brands, global diversification and discount valuation.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.