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This Buffett Stock Just Invested in the Marijuana Industry

By Sean Williams - Oct 31, 2019 at 6:06AM

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One of Buffett's worst-performing stocks wants its piece of the green rush.

Warren Buffett is largely recognized as one of the most successful investors of our generation. In a span of about 65 years, Buffett grew his net worth from about $10,000 to north of $82 billion, and in doing so helped to create more than $400 billion in value for shareholders of his conglomerate Berkshire Hathaway (BRK.B -0.78%) (BRK.A -0.87%). Buffett has been the CEO of Berkshire for five decades.

Perhaps the thing that's most interesting about Buffett is that his investing strategy is as simplistic as it gets. No fancy charting software, no hostile takeovers, and no dart throws here. Instead, the "Oracle of Omaha," as he's now known, focuses on a handful of industries and sectors that he understands very well, and buys into businesses that he believes have competitive advantages. After buying, Buffett simply allows time to work its magic. Of Berkshire Hathaway's top holdings, some have been held for more than 30 years and counting.

Berkshire Hathaway CEO Warren Buffett in a crowd of people

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.

Here's why you won't see Buffett investing in cannabis stocks

While there are countless Buffett-isms and quotes to go around, one thing Buffett has traditionally not done over his investing career is to chase hot and unproven trends. This is why, despite their rapid growth potential, the Oracle of Omaha has not exactly been a fan of cannabis and marijuana stocks.

You certainly can't blame Buffett for his hesitance about investing in marijuana. It's a substance addressed by a variety of laws depending on the country, state, or even city you're in. Furthermore, there isn't any resounding proof that legalized pot businesses can thrive over the long run. For instance, Canada is currently contending with a host of regulatory and procedural supply issues, while select U.S. states are suffering from notoriously high tax rates. The point is that black-market marijuana is thriving in the North American market, and it could be incredibly difficult to purge the industry of this illicit source of production.

Buffett has certainly not been shy about his views on cannabis. Earlier this year, in an interview with Fox Business, Warren Buffett was asked about his views on the possibility of Coca-Cola (KO -0.23%) entering the cannabis industry through a joint venture. Coca-Cola is one of Berkshire Hathaway's longest-tenured holdings, having first been purchased all the way back in 1988. Here was Buffett's candid response: "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."

This opinion pretty much jibes with previous comments from Buffett as to why he's avoided the tobacco industry, despite its mouthwatering fundamentals. Buffett firmly believes in businesses that have built trusted relationships with consumers, and it's too easy for companies involved in tobacco and other vices, including marijuana, to have those reputations destroyed.

A tipped-over clear jar that's packed with cannabis buds and lying atop a small pile of cash

Image source: Getty Images.

Surprise! A Buffett stock just made a $23 million marijuana investment

Therefore, you might be surprised to learn that a core Buffett holding, Kraft Heinz (KHC -1.62%), announced a $23 million investment in the cannabis industry late last week. Berkshire Hathaway currently holds a 26.7% stake in Kraft Heinz, worth $9.2 billion. This makes the food company Buffett's sixth-largest holding by nominal value.

Last year, Kraft Heinz established a venture-capital wing, known as Evolv Ventures, to invest in emerging tech companies that are poised to transform the food industry. To date, three investments have been made, with the $23 million in funding for cannabis technology start-up Flowhub being the latest.

Colorado-based Flowhub is a cannabis retail software business that aims to help marijuana companies from seed to sale. It helps with inventory tracking, ensures businesses remain compliant with federal, state, and/or local laws, provides point-of-sale software, and offers other business intelligence data that retailers may find useful to boost their sales. Kraft Heinz was one of five industry participants in Flowhub's recent round of financing.

Though Buffett hasn't commented on Kraft Heinz's cannabis foray, there's a reasonable chance that he wouldn't be thrilled with it. After all, aside from his reservations discussed earlier, Kraft Heinz has been one of Buffett's worst-performing stocks in 2019. In February, the company wrote down $15.4 billion in value from a variety of its well-known brands; it's still lugging around roughly $30 billion in net debt and $36 billion in goodwill on its balance sheet. I'm fairly confident in opining that Buffett would prefer to see Kraft Heinz and its venture-capital arm use their money more efficiently.

A bank customer filling out a deposit slip

Image source: Getty Images.

Buffett actually has cannabis exposure, whether he likes it or not

Despite Buffett's avoidance of the weed industry, the Oracle of Omaha does have cannabis exposure. The thing is, this exposure was already present before Kraft Heinz dipped its toes into the pond last week.

You see, Buffett is big on the financial sector. Roughly 45% of Berkshire Hathaway's invested assets are tied up in money center banks, insurance companies, payment processors, and other finance-oriented businesses. Even though marijuana remains illegal at the federal level in the U.S., that hasn't stopped the four major U.S. banks -- JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup -- from offering basic banking services in select legalized-marijuana states. Except for Citigroup, these money center banks are staples in Berkshire Hathaway's portfolio.

In 2017, financial services journal American Banker published a report that examined medical marijuana businesses operating in Massachusetts between June 2015 and September 2016. Although it could certainly be argued that the rules about supplying basic banking services to cannabis companies were stricter when this analysis was run than they are now, 34% of Massachusetts medical pot companies were shown to have an account with a big-four bank. While these accounts are hardly moving the needle for these money center banks, just the fact that they're offering basic banking services to cannabis companies at all might come as a shock.

It's unlikely that the Oracle of Omaha will change his tune on marijuana anytime soon. But it's undeniable that Berkshire's exposure to cannabis, while minuscule, could creep higher in the years to come.

Sean Williams owns shares of Bank of America. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$457,277.49 (-0.87%) $-4,022.50
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$304.26 (-0.78%) $-2.39
Kraft Heinz Intermediate Corporation II Stock Quote
Kraft Heinz Intermediate Corporation II
KHC
$38.20 (-1.62%) $0.63
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$64.88 (-0.23%) $0.15

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