1 Warren Buffett Stock to Avoid

Charlie Munger, the Vice Chairman of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  )  and longtime investing partner of Warren Buffett, is known for frequently quoting the 19th century mathematician, Carl Gustav Jacob Jacobi:

"Invert, always invert."

Munger argues that solving a problem often requires one to look at it from a counter perspective. If you're aiming to sell a product, it can be helpful to ask, "How would I get people to not buy my product."

With this "inversion" in mind, we asked five Fools to look at Berkshire Hathway's portfolio of stocks and tell us which company they would avoid buying -- rather than the typical question "Which Buffett stock would you buy?"

John Maxfield: Wal-Mart (NYSE: WMT  )

I'm not somebody who thinks Wal-Mart is doomed. At the same time, I do believe its best days are behind it.

Wal-Mart's U.S. division has now reported negative same-store sales in five consecutive quarters. Moreover, the company has now set it sights on moving down the volume chain into a realm traditionally occupied by deep discounters such as Dollar Tree and Family Dollar Stores. To me, this shows that even Wal-Mart has concluded that the market for its bread-and-butter megastores is saturated. 
 
With these issues in mind, the opportunity for growth (at least on the domestic front) appears to be waning.
 
Matt Frankel: General Motors  (NYSE: GM  )

GM's stock does have significant upside potential, but it's just too risky right now for my taste.

We still don't know the full effect and legal implications of the vehicle recalls, which seem to get bigger and bigger. After the latest round of recalls announced June 16, GM has recalled more than 16 million vehicles this year alone, more than the amount of new cars the company is expected to sell this year in the U.S. A recent report ties GM's faulty ignition switches to 74 deaths, while GM only claims responsibility for 13, so there is still a lot of potential for legal backlash.

Aside from the impossible-to-quantify eventual legal fallout, GM simply doesn't have the "wide moat" Buffett normally looks for in stocks. That is, there is nothing to give GM a distinct competitive advantage over rivals like Ford, Nissan, Toyota, and others. The auto industry itself could face challenges over time as fuel costs rise and technology evolves.

I love General Motors' products and actually own a GM car (which was just recalled), but the risk-reward just doesn't make sense, in my opinion.

Kingkarn Amjareon: Like Matt, I'm avoiding General Motors.

General Motors is one of the three largest auto manufacturers in the United States and, from a valuation point of view, does make an attractive value proposition.

However, General Motors' recall disaster poses serious bottom line risks for the company. With the recalls rolling in worldwide for a variety of safety issues, General Motors faces not only recall costs in the billions, but also painful fines or an expensive settlement with an increasingly hard-charging Department of Justice which could put short-term selling pressure on General Motor's stock price.

In addition, General Motors has suffered significant brand damage due to a series of highly publicized safety-related recalls which could hurt GM's topline growth and market share in the coming years.

Patrick Morris: I'm on the same page regarding Wal-Mart and GM, but I'd also add Starz  (NASDAQ: STRZA  ) to the companies I'd avoid.

While it trades at a very reasonable 12 times forward price-to-earnings multiple, the business scares me. With people being willing to cut ties to their cable companies -- whom Starz depends on for profits -- its long-term "moat" and future seems incredibly uncertain.

In 1991, Buffett said; "most media properties continue to have far better economic characteristics than those possessed by the average American business. But gone are the days of bullet-proof franchises and cornucopian economics."

Considering the Berkshire Hathaway position in Starz has been reduced by more than 90% from $652 million at the end of 2012 to just $62 million at last count, one has to think Buffett believes it isn't just "bullet-proof franchises and cornucopian economics," but perhaps all economics which are now gone for media companies like Starz.

Jim Royal: Coca-Cola  (NYSE: KO  ) .

Sure, Coca-Cola will continue to grow and perform adequately, but the days of real fizz are long behind this sugar-water server.

Soda sales just don't have the pop they used to in the U.S., and while Coke still has excellent opportunities abroad and an enviable distribution network that allows it to capitalize on wherever consumers' drink tastes lead, the company is just too large to have the oomph that I'd want in my portfolio.

It's a problem shared by many of the positions in Berkshire's portfolio. Of course, the government is floating Buffett billions in cash via deferred capital gains taxes, so it makes plenty of sense why he wouldn't want to sell.

But for new investors, why buy Coke with expected long-term high single digit returns at best? I know quite a few places to receive 15-20% annual returns, so most of the large, long-tenured stocks in Berkshire's portfolio are not for me, anyway.

Warren Buffett's biggest fear is about to come true
Warren Buffett just called this emerging technology a "real threat" to his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the "brains behind" the technology.


Read/Post Comments (6) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2014, at 12:39 PM, Mathman6577 wrote:

    Regarding Walmart. Until the economy improves the company likely will not see a rebound in US sales and more jobs are created. People simply do not have money to spend. It would help if the government tries to actually grow the economy instead of putting bandaids like QE 3 and forgiving student loans. How about reducing taxes, including those on corporations?

  • Report this Comment On June 28, 2014, at 1:11 AM, CoreAndExplore wrote:

    @Mathman: I agree that making the corporate tax rate more competitive with the rest of the developed world is a no-brainer, but I have to wonder about the rest of the tax code. When Bush gave his gigantic tax cuts, it cost the treasury trillions of dollars, which, coupled with two debt-funded wars, ballooned the federal debt to obscene levels. Obviously, Obama's administration has only worsened the fiscal picture.

    I would be much more for a simplified tax code, rather than simply lowering rates. "Trickle down" needs a big rethink IMO. What's more, effective tax rates are what's most important, and phenomenons such as carried interest only serve to distort things in the favor of the wealthiest. That is hardly the hallmark of a progressive tax system, and screams malfeasance.

  • Report this Comment On June 29, 2014, at 8:49 AM, Mathman6577 wrote:

    Getting ridding of the taxes on dividends would be a start (companies have already paid corp. income tax on the money they are giving shareholders).

    Reducing the marginal tax rates in the 1980's spawned a big economic boom that lasted into the 1990's.

  • Report this Comment On June 29, 2014, at 9:43 AM, irvingfisher wrote:

    #Mathman6577

    the 80s tax cut was couple with a substantial increase in gvt spending and a consequent quadrupling of the deficit.

  • Report this Comment On July 02, 2014, at 7:06 PM, Magalags wrote:

    I think we should leave the tax rates just where they are.

    Someone's gotta pay for welfare checks and all those illegal immigrants coming across our border!

    It might as well be me!

    Don't worry, I'll pay all my student loans when I'm 50!

  • Report this Comment On July 03, 2014, at 2:33 AM, donzorco wrote:

    Hey Jim - what are the places where you're getting 15-20% return annually? I'd be happy to read that article. Thanks in advance. - don (and everyone)

Add your comment.

DocumentId: 3006795, ~/Articles/ArticleHandler.aspx, 7/29/2014 2:05:08 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement