With the U.S. stock market recently at all-time highs, this article on Warren Buffett stocks to avoid is a little challenging. Buffett is a very successful investor, proving that stock investing and stock trading is not a game, but a business with rules, and you can use fundamental analysis and study economic moats of the companies to find investing success.
Two of the most famous Warren Buffett quotes are “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful” and “Price is what you pay. Value is what you get.” These are words to invest by for many current investors.
But he’s not infaliable, and following his investing strategy won’t put you on the easy road to riches. First thing, according to Luo Zuo, Associate Professor at the Samuel Curtis Johnson Graduate School of Management, Cornell SC Johnson College of Business, is to understand the difference between Buffett and a regular retail investor.
“Don’t think of yourself as another Warren Buffett if you are not currently running a multi-billion-dollar hedge fund!” Zuo wrote in an email to InvestorPlace. “I think the question that these investors should ask themselves is not whether they have picked the right or best stocks but whether they have held a well-diversified portfolio.”
Buffett is very smart, but he’s not perfect as a model for all investors. And here are some Warren Buffett stocks which, according to my financial analysis, are to be avoided in 2020. Why? The answer is mostly related to the coronavirus crisis, which changed everything about economic and business conditions for the past several months. This is a strong reason to avoid the following stocks:
- Kraft Heinz (NASDAQ:KHC)
- Occidental Petroleum (NYSE:OXY)
- Barrick Gold (NYSE:GOLD)
- American Airlines (NASDAQ:AAL)
According to CNBC, this is the Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) portfolio as of June 30, 2020. So let’s dive into this list of Buffett stocks with more details.
Warren Buffett Stocks to Avoid: Kraft Heinz (KHC)
Reading the latest stock earnings report on Yahoo Finance about Kraft Heinz, things seem to look promising. “Adjusted earnings per share of 80 cents surpassed the consensus mark of 64 cents. Moreover, the bottom line increased 2.6% year over year on the back of higher adjusted EBITDA. Net sales increased 3.8% year over year to $6,648 million. Also, the figure surpassed the Zacks Consensus Estimate of $6,521.7 million.”
So why I am suggesting to avoid Kraft stock? Even if sales grew during this coronavirus pandemic?
A few reasons. First Kraft Heinz was unprofitable for the trailing 12 months and sales for the past four years have been stagnant, and even declined in 2019. Although the stock has an attractive forward dividend yield of 5%, or $1.60 per share, the dividend history is uninspiring. It has been reduced from $2.50 in 2018 to $1.60 per share, a decrease of 36%, which is too important to ignore for investors that rely on passive income from dividends.
Also, the three-year average growth for Operating Income and Net Income is -6.82% and -18.93% respectively. And as dividends rely on earnings and free cash flows, there could be further decreased in the future. Another negative factor is that the stock has an Altman Z-Score of 0.74, being in the distress zone, implying a bankruptcy possibility in the next one of two years. To me, this is a red flag to avoid the stock.
If fundamentals are the cornerstone to analyzing stocks, which it should be, then Occidental Petroleum is a stock to avoid without any hesitation. The recent earnings report was not good, with “OXY reported second-quarter 2020 loss of $1.76 per share, wider than the Zacks Consensus Estimate of a loss of $1.66. The company recorded earnings of 97 cents per share in the prior-year quarter.”
It is not just that the company is unprofitable for 2019 and the trailing 12 months, it is also that free cash flow fell significantly in 2019, to $738 million compared to $2,749 Million in 2018.
But the key red flag to me is the debt level. With a Debt/Equity ratio of 1.54 at the end of the second quarter, up from 0.48 in 2018 for the latest quarter, plus an Altman Z-score of 0.06, in the distress zone to me, this is another example of a stock that seems both overvalued and too risky to own. Meanwhile, its forward dividend yield of 0.36% seems to be in danger for a further cut in the future.
This gold stock has gained almost 60% in 2020 with solid second-quarter earnings, but to me it appears to be overvalued. With a consensus forward P/E ratio of 24.3, it is not a value play at a current stock price about $30.
To my financial analysis, the gold price — which is near $2,000 per ounce — to me seems unsustainable. If the global economy and the U.S. economy are to recover quickly after this recent coronavirus crash, I can hardly justify the gold price at this level.
Also the basic argument that gold is a hedge against inflation does not convince me, as in the U.S., the inflation is still at low levels. That’s indicative of the Fed’s decision to be more flexible and allow for an inflation target slightly above the recent 2%.
Barrick Gold has a forward dividend yield of 1.1%, which is not too attractive. If gold prices are set for a correction, then this gold-stock could follow this trend.
American Airlines (AAL)
The coronavirus crisis has been beneficial for the stay-at-home stocks, but painful for many traditional businesses such as airlines. Airline stocks took a big hit and had to be extended a $25 billion rescue package. For the past two consecutive quarters, American Airlines posted losses, and this major business disruption has made even Berkshire Hathaway sell all its airline stocks. The article says, “The prior stake, worth north of $4 billion, included positions in United, American, Southwest and Delta Air Lines.”
Further, Warren Buffett said, “The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way.”
Yes, the world has changed, and fundamentals plus valuation for airline stocks has changed to the worst. Even before the coronavirus, profitability was at low levels with a net margin of 3.68% for 2019. And with the decision to eliminate ticket change fees on most domestic flights across cabin configurations, this could mean even lower revenues.
These Buffett stocks are not attractive either from a valuation or from a fundamentals perspective. Over many decades Warren Buffett has made great stock picks. But right now, I’d avoid these ones.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.