Buffett's Friendly Skies and Picks that Could Lift Off

Amazon's much anticipated 30-hour long "Prime Day" kicked off on July 10th, with the company offering countless bargains for Prime customers-those that pay $100 a year to receive free or reduced-rate shipping on certain items. The shopping extravaganza-the third for Amazon-is considered a mid-year Black Friday of sorts. Last year, analysts estimated that Amazon pulled in $500 million to $600 million on the blow-out sales day, (although some claimed the figure was closer to $1.8 billion worldwide) and predictions for this year hover around $2.2 billion.

Leading up to the event, the company was busy getting its delivery ducks in a row, including a fleet of over 20 dedicated Prime Air Cargo planes (expected to expand to as many as 40 over the next two years) which it leases from operators such as Atlas Air and Transport Services Group. A company press release issued on July 10th stated, "Prime Air cargo planes are fueled and ready to support Prime Day in the U.S. for the first time. Amazon's diverse delivery network continues to expand as new Prime members are added around the world."

While the aforementioned transportation operators are relatively small (market caps of about $1.5 billion each), such alliances represent a boost to players in an industry that has seen its share of ups and downs. In fact, according to a Business Insider article published in February, market legend Warren Buffett -who inspired one of the stock screening models I created for Validea-- referred to the industry as a "death trap for investors" at Berkshire Hathaway's 2013 annual meeting. It was a comment that left Wall Street all the more stunned earlier this year when Berkshire announced it had invested approximately $8 billion in carriers including Delta, American Airlines and Southwest Airlines. The move, according to the article, represented a "striking about-face" for the market guru. As usual, however, Buffett saw opportunity, and followed his own mantra of becoming greedy when others were fearful.

Perhaps it was the drop in crude prices and subsequent boost in profitability for some of the major carriers that caught his eye, or the increased focus by airline companies on improving service to attract customers in what is a highly competitive business. Whatever the reason(s), we can be certain that the Oracle of Omaha did his homework before bellying up to the tarmac.

It was no surprise when a CNBC article published last month said, "Berkshire's big bet on airlines has paid off," reporting a $174 million gain in the conglomerate's holdings in American Airlines, United Continental, Delta and Southwest Airlines over a one-day period (June 21st to the 22nd). Ironically, however, Buffett isn't an investor who banks on a 24-hour pay day. At Validea, we refer to this stock market mastermind as a "Patient Investor" because of his methodical, fundamentals-based approach to analyzing companies. He is a slow-and-steady investor who scours the market for solid companies with strong underlying operations, those that represent good value and perhaps are being overlooked by the market at large. Buffett didn't wager on the airlines based on a hunch, but rather on a firm foundation of information that pointed to long-term opportunity.

Using the stock screening models I created based on the philosophy of Buffett and other market greats, I have identified the following high-scoring transportation stocks (all of which include airline or air freight businesses):

Delta Air Lines Inc. ( DAL ) provides scheduled air transportation for passengers and cargo throughout the United States and across the world. The company earns high marks from our Lynch-based screening model in light of its ratio of price-earnings to growth in earnings-per-share (PEG ratio) of 0.41, well under the maximum allowed level of 1.0. Growth in earnings-per-share (based on 3, 4 and 5-year averages) of 25.1% falls comfortably within the preferred range of between 20% and 50%, a plus under this model. The company also scores well according to our James O'Shaughnessy-inspired investment strategy due to its size (market cap of $40.8 billion) and cash flow-per-share of $8.13 (compared to the market mean of $1.74). Number of shares outstanding (731 million) compares favorably to the market average of 629 million shares. The company also passes our Joel Greenblatt-based screen given the earnings yield of 15.28% and return-on-total capital of 34.30%.

Allegiant Travel Company ( ALGT ) is a leisure travel company that provides travel services and products to residents of under-served cities in the United States as well as air transportation under fixed-fee flying arrangements. The company earns a perfect score according to our Warren Buffett-inspired investment strategy in light of its earnings predictability and ten-year average return-on-equity of 25.2%, well above the required minimum of 15%. Free cash flow-per-share of $4.83 is considered favorable, and management's use of retained earnings reflects a return of 23.1%, a plus under this model.

C.H. Robinson Worldwide Inc. ( CHRW ) is a provider of transportation services and logistics solutions through a network of offices in the U.S. and across the globe. The company earns high marks from our Greenblatt-based investment strategy based on its earnings yield of 7.67%, and passes our Buffett-based screen due to its earnings predictability and ability to pay off debt with earnings within two years. Average return-on-equity over the last ten years of 37.0% is more than double the required minimum of 15%, a plus under this model.

United Parcel Service, Inc. ( UPS ), is a package delivery company and provider of global supply chain management solutions. The company earns a perfect score under our O'Shaughnessy-inspired stock screening model given its cash flow-per-share of $6.55 (versus the market mean of $1.74) and the number of shares outstanding of 879 million, which compares favorably to the market average of 629 million shares. Trailing 12-month sales of $61.8 billion exceed the market average ($21.4 billion) by more than 1.5 times, a plus under this model, and the dividend yield of 3.0% adds interest.

At the time of publication, John Reese had positions in DAL, ALGT, CHRW and UPS.

See Validea's Current Top Rated Stocks Using our Warren Buffett Strategy

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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