Warren Buffett's words of wisdom amid market panic; Update on Willis Lease Finance; Victims are frustrated with the Purdue Pharma bankruptcy case

1) If you've read my work for long, you probably have an idea of my feelings on the market after yesterday's moves...

After its 1.4% drop yesterday, the S&P 500 Index closed 10.1% lower from the all-time high it hit less than a month ago on February 19. That means it entered correction territory, defined as a 10% or greater fall from a previous high. It joined the tech-heavy Nasdaq Composite Index, which closed yesterday down 14.2% from its previous all-time high.

My first reaction is a shrug...

Stocks can be volatile. If you don't have the temperament to handle it, then buy index funds and don't look at the market and/or hold a lot of cash. As I've been saying for a while, cash is a perfectly acceptable option when short-term (one-year or less) U.S. Treasurys are yielding more than 4%.

Meanwhile, my second reaction is increasing excitement...

That's because other investors (read: speculators) panicking is good news for long-term-oriented value investors.

In times like this, I've found it helpful to turn back to what Warren Buffett and the late Charlie Munger have said about "irrational behavior" from other investors. Here is a collection of clips of them commenting on this at various Berkshire Hathaway (BRK-B) annual meetings. And here's an excerpt from one of Buffett's comments:

There's a certain irony that we will – we would – do the best over decades if we operated in a market where people operated very foolishly.

And the more people respond to short-term events and exaggerated things or – anything that causes people to get wildly enthusiastically enthusiastic or wildly depressed, actually, is what allows people to make lots of money in securities.

I think I'm going to make it a point that, whenever there's a market correction, I'm going to repeat Buffett's adage to "be fearful when others are greedy, and greedy when others are fearful" and publish this excerpt from his 1997 letter to Berkshire shareholders:

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

As Buffett continued in that letter, "Many investors get this one wrong":

Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

2) Turning to an update on a stock I've mentioned a few times here in my daily e-mails, reader Tom W. e-mailed me to ask:

Hi Whitney, any comments from your friend on Willis Lease Finance (WLFC) since they released their earnings?

As a reminder, I first shared my banking-expert friend's thoughts on aircraft-engine leasing company Willis in my February 8, 2024 e-mail. (I also shared updates from my friend this year on January 14 and February 3.)

The stock closed on February 8 last year at $49.50 per share... and since then, it has more than tripled to close yesterday at $166.27 per share.

However, it's down from a high of more than $200 per share in the past two weeks.

So I checked in with my friend... and here's what he e-mailed me and gave me permission to share with my readers:

Our thesis on WLFC is unchanged and we continue to believe they will see incredible earnings growth in 2025 and beyond as their leases reprice to current rates, deferred maintenance revenue is recognized, and they take delivery on their very valuable order book that was placed during Covid and before.

As an example, last month they announced that they exercised a purchase option from 2019 for 30 LEAP engines. At the time these engines were selling for $14 million, and today they are $23 million and hard to get. Lease rates for these engines were around $150,000 per month just six months ago, and are now around $200,000 today. There could be upwards of $150 million of immediate value in this purchase alone.

Turning to Willis' latest earnings report on March 10, my friend continues:

There are a lot of unique accounting anomalies with this company that make quarter-to-quarter earnings very lumpy. As for the Q4 earnings, they reported $2.81/share, which was lower than investors may have expected, but they had several items that suppressed this number such as a deferral of maintenance income due to lease extensions (this category of income isn't recognized until the engine is returned, and due to shortages most leases are just being extended), elevated stock-based compensation expense due to the increase in the share price, joint venture income that we believe was understated, and an equipment write down of $1.11/share that comes from their annual appraisal of assets.

As a refresher, they carry assets at the lower of market value or depreciated value. For example, say you have 100 engines and 97 of them are worth 20% more than a year ago, but you have three engines that are worth 5% less for some reason. The way the accounting works is you have to take the write-down but you don't take the write-up. Along these lines, the company reported a $200 million increase for 2024 alone in the difference between the carrying value and the market value of their equipment. Added to their previous unrealized gain of $400 million, there is $600 million of value not reflected in their $515 million of stated common equity.

And turning to valuation, he writes:

At $166/share, the stock only trades at a $1.1 billion market cap and we believe has $35 of earnings power in 2025 that could move towards $40-$50/share in 2026. In other words, it's trading a less than 5x this year's earnings and less than 4x next year's – that's insanely cheap!

Lastly, the airline sector has experienced some recent weakness, which has carried over into the lessors like Willis. The current supply/demand imbalance for aviation assets, particularly engines, continues to be so out of balance, however, that even with a material slowdown in air travel we believe it could be 3-4 years at a minimum before the industry can get to equilibrium, and more likely 5+ years.

As such, the stock is as high conviction as ever following their earnings release and we think the pullback creates a great opportunity.

As always, I'd like to thank my friend for his insights!

3) Turning to more feedback from my readers, here's a comment from John B. on department store Kohl's (KSS) – which I wrote about on Wednesday and called a "value trap" – that I wanted to share:

Seems like the old Peter Lynch rule applies here. My wife and daughter have been very dissatisfied with Kohls for the last 3-4 years. My wife used to love Kohls but lately she says they can't figure out who they want to be.

4) Longtime readers know I've written about the Sackler family and their privately owned drug company, Purdue Pharma...

Decades ago, the company developed a powerful opioid-based painkiller, OxyContin. Purdue marketed OxyContin to the masses... while deceiving patients, doctors, and regulators about its addictive properties. This fueled the opioid epidemic that has killed hundreds of thousands of people – and devastated large swaths of middle America.

While it took far too long, the Sacklers' misdeeds eventually caught up with them, and they put the company into bankruptcy to protect themselves – and, sadly, it seems to have worked...

Not one of them are in prison. And despite the family agreeing to pay $6.5 billion in a settlement agreement (which still keeps billions for themselves), victims haven't seen any of it yet – as this 60 Minutes segment from last Sunday documents.

I hope things change soon...

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.