Image via Wikipedia3 Stocks Warren Buffett Owns That You Shouldn'tBy Anand Chokkavelu, CFA
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October 18, 2010
Yes, the three stocks I'm about to share are all owned by Warren Buffett -- and, more importantly, I don't think they should be owned by you.
To be clear, these aren't trivial positions hiding in the corners of his Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) stock portfolio. No, together, they make up almost a quarter of it.
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Is this heresy?
Studies have proven that following Buffett pays off big time. Each quarter, Buffett must tell the world all his major stock moves via Form 13F filings with the SEC. A recent study showed that investors could have crushed the market by mimicking his moves exactly. Even with the handicap of buying those stocks up to three months after Buffett.
The study covered the period from 1980 to 2006. In those 27 years, the book value of Berkshire Hathaway as a whole went down just once. Berkshire beat the S&P 500 23 out of 27 years. And on the extreme upside, Berkshire generated 40% or more in five of those years!
Given this kind of track record and given my adoration for all things Warren Buffett (yes, I've made the pilgrimage to Omaha; yes, I read all of The Snowball including many of the deep tracks footnotes), I don't warn against buying stocks he owns lightly.
In fact, I think Buffett himself would agree with me on at least two of the three stocks I'm about to warn against.
Stock No. 1: The mistake
This first stock is easy. Unlike the other two, Buffett himself has been reducing his position in this stock. Buffett used to talk in glowing terms about Moody's (NYSE: MCO) moat. Along with a few smaller competitors, Moody's was part of an oligopoly on providing credit ratings. Because of their designation as "Nationally Recognized Statistical Rating Organizations," you pretty much had to use one of those companies if you wanted to raise debt or create an elaborate debt-based instrument like a CDO.
The problem was that their ratings had the feel of Grandma rating my childhood art projects -- always glowing and violently at odds with reality. The financial crisis autopsy revealed a broken system with the ratings agencies at the heart of it.
Moody's and S&P still dominate the industry, but regulatory measures and a maligned reputation have damaged the moat. Yet, Moody's trades at the multiples of a healthy company. And Buffett is slowly selling his position down.
But let's be clear what I mean by mistake here. Buffett's mistake was merely not selling early enough. He got Moody's stock when it spun off from Dun & Bradstreet at around $10 a share. He lost his shot at a multi-bagger, but he's still sitting on a double with his remaining shares. And admittedly, part of the reason he's selling may be a desire to separate himself from Moody's tarnished reputation; Moody's is likely to survive and possibly even thrive. I myself would love to play contrarian on Moody's, but that would be at an earnings multiple closer to five than its current value in the teens.
Stock No. 2: The blue chip bargain that's no bargain
Image via WikipediaCoca-Cola (NYSE: KO) is the prototypical Buffett stock. Huge sustainable moat. Virtually no reliance on technology. A business model simple enough that a held-back kindergartner would understand it. And so easy to operate "a ham sandwich could run [it]."
This is the kind of great company you want to get in at a good price. Well, Buffett did. More than 20 years ago. Actually, he got in at a great price, seeing his investment grow almost 10-fold. And that's a gain gotten while sleeping easily at night -- talks of the health dangers of sugary drinks aside, the duopoly Coke and Pepsi (NYSE: PEP) enjoy isn't likely to suffer a scandal like the one Moody's and S&P are dealing with.
Although Coca-Cola is down about a third from its all-time highs (somewhat ironically, the tech bubble carbonated the shares of Coke), it trades at a reasonable to slightly rich price these days. Once you factor in the low risk profile, I can't fault anyone for continuing to hold Coke today. But if you're looking for a new investment to handily beat the market, there are better opportunities out there. (Hint: keep reading).
Stock No. 3: When a moat evaporates
We just talked about Coca-Cola's imperviousness to technological obsolescence -- after all, you can't digitize food or drink.
Buffett wishes he could say the same about newspapers. Buffett grew up delivering newspapers in the early morning. As he daydreamed during his daily manual labor, even his precocious brain couldn't have envisioned the Internet that would threaten the core businesses of the Buffalo News (a subsidiary of Berkshire Hathaway) and the Washington Post (NYSE: WPO) (a significant stock holding).
Why doesn't Buffett sell? For the Washington Post, the decision is complicated by history and personal ties. But the Post has the saving grace of diversification -- both its cable television division and its Kaplan educational division are consistently profitable. As for the Buffalo News, it's important as a symbol to potential Berkshire acquisition targets. One of the reasons he gets such good deals on companies he purchases outright is his reputation for buying for the long run. For being hands-off and sticking with a business unless it becomes so bad that there really is no other course (see the Berkshire Hathaway textile mills for such a case).
That said, he said specifically about the Buffalo News that his continued ownership is "not totally rational." About the industry as a whole, he notes that "the math is really tough." In other words, the newspaper business isn't the indomitable cash cow it once was. No, even meager profitability is an accomplishment now.
Buffett has his reasons for being in the newspaper industry, but the rest of us should steer clear of any pure play newspapers that aren't at death's-door prices.
 Image via Wikipedia |
| NY Stock Exchange 1882 Hughson Hawley American Illustrator |
With these three examples, I hope it's clear that just because Warren Buffett owns something, you shouldn't blindly buy in. He may have gotten in at a much better price than you, he may have just been wrong on a stock (he is human after all), and he may have different goals than you. Plus, there's a big difference between Buffett continuing to hold a long-held position and him buying new shares.
So those caveats aside, I am very interested when Buffett makes a new move. I may not follow Buffett blindly, but you can bet your bottom dollar I follow him closely, hoping for coattail ideas.
So let me leave you with one recent move he's made that could be a great opportunity. During the financial crisis, Buffett had sold a good chunk of his Johnson & Johnson (NYSE: JNJ) stock to take advantage of better opportunities. But in the second quarter, with J&J falling a bit on recent product recalls, he increased his still-sizable position by 73%! Classic move by Buffett ... getting in on another great company at a good price (between $58 and $66 a share). J&J stock is still within that range today.
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