"Why I bought Delta’s Stock Instead of a Plane Ticket" in Humanizing Tech
Update to the open-source valuation model
I. Overview
Delta had a bad week. Every flight across the country was grounded because of a software malfunction. Their stock price dropped almost 8% from about $39 to $36.
At that point, $DAL was trading very close to its 52–week low of $32. In fact, it’s trading at a low over the last few years.
Every time I hear negative news like Brexit or Delta’s servers crashing, I immediately think “It’s on sale!” while everyone else thinks the world is ending. In animalistic terms, I smell fear. So I attack.
Up to this point, Delta has been the worst-performing asset in my Personal Hedge Fund. But, you have to remember to look at it differently. It’s now much cheaper than I originally paid, and I still believe in the strength of the company. So, I can pick up some more on sale. Like CostCo for the stock market. I pulled the trigger and purchased some shares.
II. Deciding to Double Down on Delta
Below is the The Base Code’s updated chart from our ever-expanding valuation model. Note that Delta ($DAL) is at the very top, due to the % of its price defined by Real Assets.
Whenever I see numbers that look funky in the model, like large negatives, things above 100%, or laughably ridiculous expectations for expected future growth, I know there’s an arbitrage opportunity. Flashing red lights, bells whistles and sirens should go off in your mind. The key is being able to wait out the market’s irrationality. Because I invest on a multi-decade time horizon, I’m not much worried about a company like Delta bouncing back.
The key metric to pay attention to in this instance is Real Assets. At $37/per share, Delta’s planes, fuel, and equipment is worth more than the market price of the stock. So, an enterprising corporate raider could take over the company by buying enough on the open market and offering a premium to existing investors, break up the company and sell its pieces.
The probability of that happening is small but it’s a helpful thought experiment. A few other reasons include:
- I also know they have a capable operating and management team.
- I personally choose Delta for air travel whenever I can because I see the upgrades being rolled out faster than competitors.
- Airlines make most of their money from recurring business travelers who are more price inelastic (e.g., willing to spend higher amounts of money per ticket). And if Delta caters to anyone, it’s the high-end business traveler with status.
- Finally, they have one of the best rewards programs in the country, which incentivizes further use of their credit card, creating a potential captive finance institution for them.
III. Open-Source Valuation Model
We’ve gone ahead and added Delta to the model along with Twitter so you can see how these companies continue to rank against one another. Then, you can do your own analysis and make your own buy decisions. Tesla and NVIDIA are also updated after their Q2 2016 earnings release. Please note that this is comment only and not edit-able due to the fragile nature of the model. Give me a shout if you want a copy.
The Base Code: open-source valuation model
Remember the mantra: BOSAH (buy on sale and hold).
— Sean
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Why I bought Delta’s Stock Instead of a Plane Ticket was originally published in Humanizing Tech on Medium, where people are continuing the conversation by highlighting and responding to this story.
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