Few investors have the investing acumen of Warren Buffett. Known as the "Oracle of Omaha" for a reason, Buffett, the CEO of conglomerate Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), has turned roughly $10,000 in seed money in the mid-1950s into well over $83 billion today in personal wealth. Mind you, Buffett has donated billions of dollars to charity over the years, so his net worth could have been even higher.
Because of Buffett's success in consistently beating the stock market four out of every five years (at least in terms of generating better returns on book value), investors regularly track his every movement. Despite a simplistic approach of buying high-quality companies and hanging on to them over the long run, Wall Street and investors nevertheless cling to their chairs waiting for the next "Buffett pick."
Which stocks will Buffett exit next?
However, this is a two-way street. Just as Buffett has made a living off identifying solid business models that could grow over time, the other part of his success comes from knowing when to sell. While he's certainly not infallible (selling Disney --twice -- cost Buffett a pretty penny), the Oracle of Omaha's sells are considered just as noteworthy as his buys.
Thankfully, with Berkshire Hathaway having well over $100 million in assets under management, it's required to file Form 13-F with the Securities and Exchange Commission 45 days following the end of every quarter. This filing gives everyone a look under the hood, so to speak, of what Buffett and his team have been up to over the previous quarter. In Berkshire's mid-November filing, we discovered that Buffett and his team had completely sold out of two stocks in the third quarter: retail behemoth Walmart and French drugmaker Sanofi.
The real question is: Which of the 47 securities in Berkshire Hathaway's portfolio might be on the chopping block next? My suspicion is that the following three stocks already have one foot out the door.
Johnson & Johnson
Although Berkshire Hathaway only currently owns 327,100 shares of Johnson & Johnson (NYSE:JNJ) -- a market value of $42 million -- it seems the likeliest of Buffett's 47 securities to get the boot next.
On the surface, Johnson & Johnson, a healthcare conglomerate with its fingers in pharmaceuticals, medical devices, and consumer health products, looks like a winner. It has increased its adjusted earnings per share for 35 consecutive years, is a Dividend Aristocrat with an above-average yield, and is one of just two publicly listed stocks to carry a AAA credit rating (the other being Microsoft). With healthcare being mostly impervious to economic downturns, J&J looks like a candidate to hang on to for the long run.
However, there are a few telltale signs suggesting that Buffett will want out. For starters, Buffett has never been all that keen on owning healthcare companies that require regular research. In other words, drugmakers that necessitate plenty of care and maintenance because of clinical trials simply aren't Buffett's cup of tea. In recent years, Johnson & Johnson has been focusing more on its high-margin pharmaceutical segment via acquisitions. Between 2012 and 2018, pharmaceuticals as a percentage of total sales has climbed from 37.7% to 49.9%. That's a worrisome trend for Buffett, and a possible sign of sales volatility many years down the road.
The company may also face continued backlash over its talcum powder. Allegations have been presented that J&J knew its talcum powder contained small amounts of asbestos. Having already lost a $4.7 billion lawsuit last summer, the company's legal exposure could be an overhang for years to come.
And finally, Buffett has already pared back his holding in J&J a few times previously. With only $42 million remaining in Berkshire Hathaway's portfolio, I'm looking for Johnson & Johnson to be shown the door.
American Airlines Group
Perhaps the wildcard of the three stocks Buffett will sell next is American Airlines Group (NASDAQ:AAL). The reason I say "wildcard" is because, like Johnson & Johnson, the company appears to be doing just fine on the surface.
Last week, American Airlines Group reported a full-year net profit of $2.1 billion, excluding certain one-time items, with passenger revenue climbing nearly 4% for the year. Keep in mind that this $2.1 billion in net profit was derived despite a 33% increase in full-year fuel costs to $1.84 billion from $1.38 billion in 2017. Add the nearly $1 billion the company returned to shareholders via dividends and buybacks, and everything would look to be, pardon the pun, flying high.
However, Buffett has never particularly been a fan of businesses that require a large capital input to produce a small margin, which is the hallmark of the airline industry.
Even more telling, American Airlines Group, despite its synergies with US Airways and its nearly $1 billion in shareholders returns via its dividend and buybacks, has close to $30 billion in net debt. That's troublesome with the Federal Reserve in a monetary tightening cycle and the U.S. economy probably in the latter stages of an economic expansion. Whereas healthcare is relatively recession-proof, airlines are not. Discretionary spending will decline if the economy contracts, and airlines with large debt loads could find themselves in big trouble. That's why I singled American Airlines Group out rather than United Continental Holdings, Delta Air Lines, or Southwest Airlines, which are also in Berkshire Hathaway's portfolio.
Also, don't overlook that Buffett sold 1 million shares of American Airlines Group in the third quarter. Even though we're only talking about a little more than 2% reduction (Berkshire still owns 43.7 million shares), it could be foreshadowing a bigger move to come from the Oracle of Omaha.
Last, but not least, even though it's by far the smallest holding in Berkshire Hathaway's portfolio, my prediction is that telecom giant Verizon (NYSE:VZ) finally gets the heave-ho.
During the fourth quarter of 2016, Berkshire Hathaway essentially disposed of all of its holdings in Verizon, with 15 million shares sold. However, 928 shares, currently worth just over $52,000, remained. My best guess as to why these shares remained is that Berkshire was involved in a dividend reinvestment plan for its Verizon stock and received these shares as the result of holding some unknown number of shares before the record date. Key phrase in that sentence is "best guess."
The thing is, Verizon doesn't really hit on the key points that Buffett would look for in an investment. It's relatively slow growing, has few near-term catalysts, and is frankly getting too big for its own good. All we have to do is look to AT&T for evidence of this. Having been an investor in DirecTV, which was acquired by AT&T, Berkshire wasted little time in disposing of the AT&T shares it received as a portion of the cash-and-stock buyout. If Buffett didn't care for AT&T, it's not going to see any real differentiation with Verizon.
Plus, with Buffett having essentially axed Verizon from the portfolio two years ago, selling 928 shares is hardly going to cause a stir on Wall Street.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Sean Williams owns shares of AT&T. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Southwest Airlines, and Walt Disney. The Motley Fool owns shares of Delta Air Lines, Johnson & Johnson, and Microsoft. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.