Stocks Warren Buffett and George Soros Disagreed On in 2nd Quarter

Soros sold out of some stocks he and Buffett had held in common

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Sep 01, 2017
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Despite vastly different investment styles, Warren Buffett (Trades, Portfolio) and George Soros (Trades, Portfolio) sometimes overlap on businesses they think worth owning.

Buffett, who espouses a famous fundamentals-based, long-term approach, stands in stark contrast to fellow billionaire Soros, who is more apt to make calls based on trends, speculation and macroeconomic predictions. The fact is evidenced in their respective rate of portfolio turnover. In the second quarter, turnover in the Berkshire Hathaway portfolio totaled 2%, while Soros’ elevated 15%. Much of the second-quarter transformation by Soros narrowed his list of companies on which he agreed with Buffett from 16 to eight.

Whereas Buffett will likely hold a stock through a valley, Soros more often walks if a company shows little to no upside, which could say something about his opinion of the stocks he dropped recently. The three largest Buffett stocks Soros had owned but unloaded in the second quarter were: Goldman Sachs (GS, Financial), American Airlines (AAL, Financial) and United Continental (UAL, Financial).

Goldman Sachs

Soros just purchased Goldman Sachs late last year and early in 2017. Because of a spike in its share price in November preceding the election, Soros either made a large or meager profit on the position.

Buffett has 11 million Goldman shares dating from 2013, when his $5 billion crisis-era bet ripened into a payday of $2 billion and 13.1 million shares. Buffett sold only around 2 million shares of the stake during its ascent from his $115 per-share strike price on the converted warrants, to $222 on average in the second quarter.

The second-leading investment bank, Goldman Sachs beat Wall Street expectations on earnings, revenue, compensation expense and non-compensation expense.

"A mixed operating environment persisted into the second quarter as conditions continued to support underwriting and M&A, while constraining certain market-making activity," Goldman CEO Lloyd Blankfein said in a statement. "Against that backdrop, we produced revenue growth and improved profitability for the first half of 2017, reflecting both the diversity and strength of our global businesses."

In investing & lending, Goldman swept a 42% increase in net revenues year over year and an 8% gain from the previous quarter. Net equity securities also rose 88% from the second quarter of 2016 on net gains from private equities, which were boosted by “corporate performance and company-specific events.”

The bank’s shares slid on the results as its investment banking unit saw net revenues decline 3% from the second quarter last year but up 2% from the previous quarter. Net revenues in institutional client services were also off by 17%, and more worryingly, revenue in its fixed income plummeted 40% due to a challenging environment.”

Recent headlines have stated that investor pressure is driving Goldman Sachs to explain its bond trading strategy as returns in the segment plummeted 40%. The typically closed-door bank will outline its turnaround strategy in an industry conference on Sept. 12, according to CNBC.

American Airlines

Berkshire doubled its American Airlines stake in the fourth quarter and currently owns 47 million shares, or 9.65% of the airline, with an estimated gain of 12%.

George Soros (Trades, Portfolio) has traded American Airlines since its merger with US Airways Group in 2013 and exited in the second quarter.

The airline’s stock treaded 4.2% lower year to date, against a 4.9% drop for the S&P 500 airline sector, according to Yardeni.

Competition and business challenges have typically squeezed returns for airline investors, as the average airline’s returns failed to exceed the industry’s cost of capital, according to the International Air Transport Association. But a resurgence in the past two years looks to continue into a third. For next year, the organization forecasts an industry return of 8.8%, which it said does “adequately reward equity owners.”

Still, it does not expect stellar returns.

“On invested capital of almost $600 billion, the industry is forecast to generate $7.9 billion of value for investors this year. But it should be clear that $31.4 billion net profit, while exceptional for the airline industry, is really only sufficient to pay investors a ‘normal’ return for risking their capital,” its mid-year economic report said.

Further, this year’s third-highest profitability on record for the industry comes as impediments ranging from unit costs and slowing demand on growing capacity drive lower earnings, the report warned.

For the second quarter, American Airlines reported $11.1 billion in revenue, 7.2% higher than a year ago. Earnings declined to $803 million from $950 for the same periods, negatively impacted by a 15.4% increase in fuel prices.

American Airlines also in its second-quarter release reiterated several of its long-term investments, such as broadening its basic economy offering to 78 markets and putting $200 million into expanding its luxury flights.

United Continental

Soros primarily engaged in speculation on the second airline, United Continental. For the past year and a half, he alternated buying and selling shares every quarter, making an exit in the most recent.

On the opposite end of the spectrum, Berkshire took a 9.27% stake in the company over the last half of 2016. In the second quarter, managers sold only less than 3% of their shares as the stock’s price continued to rise.

After a steep drop on its July earnings report, shares of United Continental were off 14% year to date, to close at $62.43 per share.

United Continental posted EPS and revenue higher than analysts’ targets in the second quarter. EPS hit $2.75 vs. $2.67, and revenue came in at $10 billion vs. $9.97 billion. For the same period last year, United had $2.61 in EPS and $9.40 billion in revenue.

The airline also saw a 2.1% year-over-year increase in consolidated passenger revenue per available seat mile. Cargo revenue increased 22.1% on higher volumes.

On the cost side, operating expenses rose 3.2% year over year. Consolidated unit cost per available seat mile declined 1% due to lower special charges, somewhat offset by increased labor and fuel expenses.

The airline also experienced the impact of the industry’s rising fuel costs. Aircraft fuel expenses rose 16.1% from the comparable quarter, or $232 million, driven by a 13.2% increase in the average price per gallon. United estimated that a $1 uptick in the price of fuel will translate to a $95 million higher charge for the year.