In the investing world, knowing what not to buy may be equally as important as knowing what to buy.
After around 70 years of investing, Warren Buffett has undoubtedly emerged as one of the great investors all of time, but also one of the pickiest. Unlike some money managers that jump in and out of investments at breakneck speeds, Buffett's portfolio at Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) continues to exemplify the notion of buy and hold... forever.
Most Buffett fans, us here at the Fool included, love to play the game of trying to predict Buffett's next target for a big acquisition or investment. However, if we look at some companies that the Oracle of Omaha wouldn't touch with a ten-foot pole, there may be some lessons learned.
1. Apple (NASDAQ: AAPL)
If Buffett were to invest in Apple, such an investment would likely shatter the record for most tweets per second on Twitter and cause a CNBC commentator to simply explode. But rest assured, I do not believe Warren Buffett will make an investment in Apple. Despite the company's enormous pile of cash and track record of generating fat margins, Buffett views companies with a time horizon that can span well beyond 20 years. Although the iPhone-maker commands the best margins in the industry today, Buffett realizes the likelihood that the technology hardware landscape will change over the next several years is huge compared to a shift in the landscape of say, banking.
2. Netflix (NASDAQ: NFLX)
One of the things Warren Buffett looks for in a company is a strong and visionary leader. And Netflix has that in CEO Reed Hastings. However, Buffett also values a company with a significant "competitive moat" and that spits off tons of cash. Netflix does not have that. Despite being the first mover in the space, and its recent effort to create original content, prices for outside content will continue to rise as more companies enter the streaming space. Although Netflix stopped reporting its "churn" rate, most estimate that this rate is fairly low -- as competition emerges, there's not much that will keep customers from fleeing to a different service.
3. American Capital Agency (NASDAQ: AGNC)
Buffett has been a longtime housing bull, but investing in America Capital Agency, a mREIT that invests primarily in mortgage-backed securities, is not his style. Unlike some REITs that actually own real estate and collect rent on those properties, American Capital Agency is essentially a fund that invests in MBSes and finances these purchases through short-term repurchase agreements (leverage). This is not Buffett's cup of tea -- not to mention that Buffett could buy plenty of MBSes if he wanted to, at probably lower funding costs via his access to Berkshire's float.
4. Baidu (NASDAQ: BIDU)
A Chinese version of Google? Sounds great! But not to Buffett. Baidu has seemingly endless opportunities to capitalize on the gigantic Chinese population and the country's shift to a consumer-centric economy. However, despite its dominant position in the market, there are too many question marks around the company's ability to adapt to growth in mobile. The ever-changing world of search and operating systems will make Buffett a spectator from the sidelines.
5. Intuitive Surgical (NASDAQ: ISRG)
At first glance, the product line developed by Intuitive Surgical looks like something from a science-fiction movie set in a world ruled by robots. The company has been one of the first movers in a space that is undoubtedly in its infancy and may ultimately dominate the market. However, Buffett has always steered away from cutting-edge technology and waited for value to emerge when excellent companies are presented at more reasonable prices.
6. Cliffs Natural Resources (NYSE: CLF)
Although Buffett has shown a penchant for capital-intensive businesses with a management team focused on returning value to shareholders, the competitive pressures on Cliffs Natural Resources and debt on the company's balance sheet is enough to make Buffett keep his distance. In addition to its massive debt load, Cliffs relies on a handful of companies for nearly half of its revenue.
7. Whole Foods Market (NASDAQ: WFM)
Whole Foods Market is often jokingly labeled "Whole Paycheck" because of its steeper-than-average grocery prices. Similarly, the company's stock price also sports a high price tag. Despite trading over 10% lower than its all-time high, the stock still trades at almost 34 times trailing earnings. The grocer's fiercely loyal customer base and brand power are not compelling enough for Buffett to pay up for shares of the leader in a historically low-margin industry.
8. Dendreon (NASDAQ: DNDN)
Many investors consider biotech investing too volatile and too risky. If you have followed Dendreon's stock performance over the last five years, you probably wouldn't argue with that notion. The company does not have a huge basket of drugs to bolster earnings while developing new home-run products. As the company continues to burn through cash and be weighed down by debt, the threat of shareholder dilution will keep many major investors, including Buffett, far away from the stock.
9. Herbalife (NYSE: HLF)
Despite his unearthly success, Buffett remains remarkably humble; this is exactly why he would never jump into the debacle that surrounds Herbalife, which has become a medium for a hedge fund ego-fest. After the company was thrust into the spotlight by Bill Ackman and Carl Icahn, many assert that the company is essentially an illegal pyramid scheme because of its opaque multi-level marketing strategy. I'll stop at "scheme" and "opaque." Buffet ain't buying.
10. DryShips (NASDAQ: DRYS)
Some pundits and investors called Buffett crazy when he plowed over $30 billion into a railroad. Could Buffett further increase Berkshire's exposure to the industrial transportation and logistics business by buying stake in an ocean transporter? Maybe, but it won't be via DryShips. The company has been flailing in the wind since the financial crisis as it has struggled to generate free cash flow. Solvency questions have been raised, and the debt-heavy balance sheet will strike fear into the hearts of equity investors.
More to come!
On May 4, Berkshire Hathaway will be holding its epic annual meeting in Omaha, and the Fool will be there to bring you everything you need to know from this "Woodstock for Capitalists." Simply click here to follow along with all of the Fool's coverage.
We will also be updating the links below throughout the next two weeks as we continue to run through the 12 Days of Berkshire, so be sure to check back here, or on Fool.com, for plenty more on Berkshire and Buffett.
Thanks to the savvy of investing legend Warren Buffett, Berkshire Hathaway's book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool's premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy as well as important risks to watch out for. Click here now for instant access to Joe's take on Berkshire!