In case you missed it, the mecca of all investing events occurred this past weekend. That's right, folks -- Warren Buffett and Charlie Munger, the heads of conglomerate Berkshire Hathaway (BRK.A 1.01%) (BRK.B 0.93%) took to the stage for hours to once again answer questions and provide invaluable investing insight.
As has become tradition, Buffett will often sit down for multiple interviews prior to taking the stage for Berkshire's annual meeting, including with CNBC anchor Becky Quick. Over the past couple of years, quite a many nuggets of wisdom, and even breaking-news events, have emerged from these sit-down discussions. In fact, just last week we learned that Berkshire Hathaway was an active acquirer of Amazon.com stock during the first quarter, albeit Warren Buffett had no direct influence over those trades, with one of his two other key money managers making the purchase(s).
Buffett doesn't see green pastures with the marijuana movement
But it was an interview with Fox Business Network anchor Liz Claman that may have stolen the show. While speaking with both Buffett and Charlie Munger on Friday, May 3, the day before Berkshire's annual shareholder meeting, the duo discussed one of the company's largest holdings, Coca-Cola (KO -0.46%), and the possibility that it could become involved as a player in the cannabis industry. According to Claman, the response from Buffett regarding Coca-Cola and cannabis was as follows:
"It would be a mistake for Coca-Cola to get into the marijuana-cannabis business. They have a wholesome image and that would be detrimental to it."
For those who may not recall, Coca-Cola was rumored to be in discussion with two major marijuana growers in 2018: Aphria (APHA) and Aurora Cannabis (ACB 9.32%).
Aphria is expected to slot in as the third largest grower by peak production at 255,000 kilos a year, but has been reeling since early December after a short-seller report alleged the company had overpaid for three Latin American assets. Despite an independent committee finding the price paid was within a reasonable range, Aphria wound up taking a 50 million Canadian writedown on the acquisition in its most recent quarter, further hurting shareholders' confidence in the company.
Meanwhile, Aurora Cannabis has the pedigree of a company that's just waiting for a global, brand-name partner. Aurora is expected to produce more marijuana than any Canadian grower on an annual basis, and it has a broader international presence than any other pot stock. All that's really missing is a deep-pocketed partner. However, my suspicion is that Aurora's tendency to lean on common stock issuances to finance its numerous acquisitions may have scared Coca-Cola away from taking an equity stake. Had Coca-Cola taken the plunge, its stake would have been continually diluted.
Instead of diving in headfirst, Coca-Cola CEO James Quincey has been adamant since October -- a commitment he reaffirmed in an interview with Yahoo! Finance following the company's most recent quarterly results -- that his company has no intention of entering the cannabis space.
Neither Buffett's nor Coca-Cola's views should surprise you
While it might appear surprising that an avid capitalist like Buffett, or a global brand like Coca-Cola, would quickly dismiss the fast-growing cannabis industry, there are valid reasons for each to keep their distance.
With regard to Coca-Cola, there are no assurances that nonalcoholic cannabis-infused beverages will be a needle mover. Even though Canada is preparing to give numerous marijuana derivatives the green light by October, the infused beverage space is expected to be crowded, which could limit the profitability of pot-based beverages, be they cannabidiol (CBD)-, tetrahydrocannabinol (THC)-, or combo-based. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits, whereas THC is the psychoactive cannabinoid known for getting the user high. In other words, Coca-Cola is diverse enough geographically, and has a large enough portfolio of products, that entering the cannabis space isn't necessary at this time.
As for Buffett, there are multiple reasons he and Berkshire Hathaway, which owns a 9.4% stake in Coca-Cola worth $18.9 billion, would shy away from marijuana. To begin with, consider that Buffett and Munger are 88 and 95 years old, respectively. They have an old-school mindset about cannabis, and surveys regularly show that as age increases, favorability toward cannabis tends to decrease. Buffett's commentary about Coca-Cola maintaining is "wholesome image" is testament that the Oracle of Omaha doesn't believe the grass would be greener for the beverage giant with a cannabis company in its corner.
From a business perspective, the marijuana industry would raise a number of red flags for Buffett. As a buy-and-hold investor, Buffett tends to favor time-tested, profitable business that trade on reputable U.S. exchanges. Comparatively, most marijuana business are only a few years old, many aren't profitable on an operating basis, and fewer than a dozen trade on a major U.S. exchange. Not to mention, the legality of cannabis is all dependent on the country in question, and that's not something Buffett or Munger would likely buy into.
Cannabis might be the fastest growing industry in North America right now, but for Warren Buffett it's a big marijua-no.