One of the more interesting debates in the market is whether Warren Buffett and Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) have lost their touch. After all, this is a roaring bull market, with the Nasdaq composite up 42% in the last year. Yet it’s been tech stocks, not the traditional types of Warren Buffett stocks, that have led the way.
With a cost basis reportedly around $35 per share (adjusted for this year’s stock split), Berkshire has nearly quadrupled its investment. With gains exceeding $90 billion, Berkshire’s buy of Apple on an absolute basis is almost certainly the greatest trade in history.
Berkshire has other winners as well, as I noted in August. And it’s stretched its universe a bit of late (likely due to the influence of deputies Ted Weschler and Todd Combs). Investments in the initial public offering of Snowflake (NYSE:SNOW) and an admittedly small purchase of Barrick Gold (NYSE:GOLD) both sit outside the normal range of Warren Buffett stocks.
Still, Berkshire has underperformed. It’s lagged all three major indices on a total return basis over the past 10 years. Returns in the Nasdaq composite have been more than twice as high.
There are some clunkers in the portfolio. And while it’s always difficult to argue against the Oracle of Omaha, these are four Warren Buffett stocks that Berkshire would do well to exit:
- Coca-Cola (NYSE:KO)
- Wells Fargo (NYSE:WFC)
- American Express (NYSE:AXP)
- Teva Pharmaceutical (NASDAQ:TEVA)
Warren Buffett Stocks to Sell: Coca-Cola (KO)
Admittedly, it would be stunning if Berkshire sold KO stock any time soon, if ever. Coke might be the most well-known of the Warren Buffett stocks.
Berkshire first bought KO stock in 1988, not long after the October 1987 stock market crash. It paid about $1.3 billion at the time for its stake. In 2020, Berkshire will earn roughly $65o million in dividend income alone from its holding, an incredible 50% of its cost basis.
But KO underperformed for years. Even including those dividends, Coke stock has badly underperformed the Dow Jones Industrial Average — the weakest of the three major indices — over multiple time periods. Total returns in KO over the past decade have been just shy of 100%; the DJIA (including dividends) gained 270%.
A recent rally has moved the stock to all-time highs, but the future looks questionable. Consumers increasingly are moving to sparkling water and other lower-sugar options. A massive “refranchising” effort has helped Coca-Cola’s profit margins, but the associated plunge in revenue has resulted in minimal earnings growth over the past decade.
As I noted roughly two years ago, we’ve seen plunges in stocks that look an awful lot like KO: Anheuser-Busch (NYSE:BUD), Kraft Heinz (NASDAQ:KHC) (in which Berkshire has a large stake), and Altria (NYSE:MO). All three eventually succumbed to the pressures of a changing world. It still seems possible, if not likely, that KO stock will suffer the same fate.
Wells Fargo (WFC)
To be fair, Berkshire already is selling its Wells Fargo stock. Its position has steadily decreased of late.
The stake should drop to zero at some point. Berkshire already has exited big banks JP Morgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS). Both names look more attractive than Wells, which continues to suffer from an endless series of scandals.
To be sure, Berkshire made billions off Wells Fargo, which it first bought in 1989. But the refusal to sell in recent years violated many Buffett maxims about the quality of management. Buffett initially defended Wells Fargo, saying it was “a great bank that made a terrible mistake.” Recent selling suggests that he and Berkshire rightfully have decided that’s no longer the case.
American Express (AXP)
There’s an obvious theme here. The weakest Warren Buffett stocks all were first bought by Berkshire in the 1980s, provided massive returns for decades, and now are struggling to adapt to a changing world.
American Express is no exception. Rivals Visa (NYSE:V) and Mastercard (NYSE:MA) continue to hoover up market share. As a result, AXP has lagged badly. The 176% rally in AXP stock over the past 10 years seems impressive, but V and MA (in which Berkshire owns smaller stakes) have gained over 1,000% during the same period.
There are worries going forward as well. Market share gains may continue given potentially weaker branding among millennials and younger consumers. Newer payment plays like Square (NYSE:SQ) and PayPal (NASDAQ:PYPL) growing quickly, and even cryptocurrency represents a risk.
It would be difficult for Berkshire to exit its AXP stake, at least quickly. The conglomerate still owns almost 19% of American Express, which means it alone can move the market for the stock. But it wouldn’t be terribly surprising if Berkshire started lightening up on AXP.
Teva Pharmaceutical (TEVA)
Generic drug maker Teva Pharmaceutical is one of the more surprising Warren Buffett stocks. That may have been because, as with Barrick, it’s likely that either Combs or Weschler in fact made the purchase.
Regardless of who made the buy, it hasn’t worked out. TEVA is down by roughly half since Berkshire entered in 2018. And while that dip might seem to present an opportunity to average down, it in fact suggests a reason to sell.
The problem for Teva is the combination of an onerous debt load and minimal growth. The generic industry as a whole continues to struggle owing as much to industry dynamics as competitive factors. There simply aren’t enough blockbuster drugs going off-patent to goose returns for the likes of Teva.
That may change at some point in the future — but even if it does, Teva still has a badly overleveraged balance sheet to contend with. The case for TEVA was intriguing — in fact, I made that case myself — but at this point, it’s time to cut losses.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.