Warren Buffett is without question one of the greatest investors of all time. His track record at Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) (and even before Berkshire) proves it. Exelixis (EXEL -1.66%) is one of the greatest winners in the stock market in recent history. Its stock-price appreciation proves it -- with gains of 1,500% in just three years.
Would one of the greatest stock market winners be a likely pick for one of the greatest investors? Actually, no. Exelixis wouldn't be a Warren Buffett stock right now -- and possibly never would. Here are three reasons why.
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1. Biotech isn't in Buffett's wheelhouse
One of the key investing principles of Warren Buffett's is to invest in what you understand. If you look at Berkshire Hathaway's holdings, you'll find that it's loaded with stocks of consumer products and financial services companies -- the kinds of businesses Buffett understands really well.
In general, it's safe to say that biotech isn't really in Buffett's wheelhouse. Exelixis' research and development process for cancer drug Cabometyx wouldn't be something with which the Oracle of Omaha would be very familiar. I doubt that Buffett has spent a lot of time digging into the FDA-approval hurdles and reimbursement negotiations that companies like Exelixis face, either.
This doesn't mean that Warren Buffett totally avoids the biopharmaceutical industry. In fact, Berkshire's portfolio currently includes two drugmakers: Johnson & Johnson (JNJ 0.67%) and Sanofi (SNY -1.56%). However, these two stocks are definitely exceptions for Buffett. Johnson & Johnson also has a large consumer business that fits well in Buffett's sphere of expertise. As for Sanofi, we'll look at why Buffett likes the French drugmaker shortly.
2. Exelixis stock isn't priced attractively
Warren Buffett is, at heart, a value investor. Granted, Buffett sometimes deviates somewhat from a pure value-investing perspective, and has said that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Still, he likes to find stocks that are attractively priced.
Exelixis stock clearly wouldn't meet Buffett's ideal. The biotech's shares currently trade at 139 times trailing-12-month earnings and nearly 42 times expected earnings. Even when you factor in projected earnings growth over the next few years, Exelixis' valuation looks high.
3. Buffett would question Exelixis' moat
Warren Buffett loves stocks of companies that have moats, or sustainable competitive advantages. He wants to own businesses that can keep growing earnings and cash flow over the long run. He once said, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."
I suspect that Buffett would question Exelixis' moat and ability to continue its success for the next 10 years. Cabometyx is a great drug for treating kidney cancer; it could very well prove to be a great drug for treating liver cancer, also. However, there's simply no way to know that Cabometyx will be a top treatment for either disease a decade from now. There's so much innovation going on in the biopharmaceutical industry that today's best therapies could be obsolete in just a few years.
My hunch is that Buffett's experience with Sanofi could make him even more wary of investing in drugmakers. Back in 2011, Berkshire Hathaway sent a letter to the Securities and Exchange Commission that discussed several of its holdings, including Sanofi. In that letter, Berkshire stated that the company believed that Sanofi possessed "a significant economic franchise and potential for continued growth in earnings and earnings per share." Here's what actually happened for the French drugmaker over the last six years:
SNY Net Income (Quarterly) data by YCharts.
Through the years, Berkshire Hathaway dramatically reduced its stake in Sanofi. (The company also sold much of its position in Johnson & Johnson, by the way.) If Warren Buffett can't accurately predict the capability of a huge drugmaker like Sanofi to sustain its moat, it's highly unlikely that he would even attempt to do so with a much smaller biotech like Exelixis.
You're not Buffett
While biotech might not be in the legendary investor's wheelhouse, it could be in yours. Even if it isn't now, it could be with enough research. You don't have to understand all of the science behind biopharmaceutical research to be successful at investing in biotech stocks.
Also, value investing isn't the only investing style around. Exelixis isn't a value stock by any means, but it could fit nicely into the portfolios of growth-oriented investors.
Finally, although it's true that Cabometyx might not have a sustainable moat for Exelixis, it's also true that the company isn't limited to just one drug for all time. Exelixis CEO Michael Morrissey has said that the company intends to expand its pipeline through internal development and through acquisitions.
Warren Buffett isn't likely to ever buy Exelixis stock. But remember this: You're not Warren Buffett. And you don't have to be like Buffett to still be a successful investor.
