Berkshire Hathaway (BRK.A 0.55%) (BRK.B 0.49%) CEO Warren Buffett has a knack for picking winners, which is why he's arguably the most-followed Wall Street investor. Having beat the market more often than not, Buffett has seen his net worth grow by $89 billion over the past 65 years, all while creating in excess of $400 billion in value for Berkshire's shareholders.
But one thing Buffett is not is perfect -- which is perfectly OK, because no investors are perfect. For example, Buffett's decision to buy stodgy tech stock IBM proved less than fruitful for investors, while his investment in U.K.-based grocer Tesco ultimately backfired. Buffett also misfired by selling off stock in Walt Disney far earlier than he should have, which has cost the Oracle of Omaha at least $16 billion in would-be capital gains.
At the moment, a vast majority of the 48 securities held in Berkshire Hathaway's portfolio have the hallmark of being winning stocks. Yet, there are three that should be placed on the naughty list as we head into 2020.
Without question, the disaster du jour of 2019 for Buffett was his company's investment in Kraft Heinz (KHC 0.21%). In February, Kraft Heinz took a monstrous writedown on the value of certain brands totaling $15.4 billion. The scary part is that this did little to actually make its balance sheet look more appealing. As of the end of the third quarter, the company still had $35.8 billion in goodwill and $29 billion in net debt. Essentially, it signals that more writedowns may be coming.
The company's $29 billion in debt is particularly worrisome given that Kraft Heinz's growth engine has completely stalled out. The company needs money now more than ever to reinvest back into its brands and reignite growth. However, because Kraft Heinz is buried under long-term debt, it has little choice but to tighten its belt and sell off a number of noncore brands. This is a recipe for subpar sales and EBITDA (earnings before interest, taxes, depreciation, and amortization) growth in the years to come.
As for Buffett, he's fully admitted that Heinz grossly overpaid for Kraft Foods, but Berkshire is virtually trapped in its position. With 325.6 million shares owned (26.7% of Kraft Heinz's outstanding shares), Buffett has no viable means of exiting the position without causing further share price deterioration in the stock. The world's most-followed investor is thus left to cross his fingers and hope things get better, which last I checked isn't a smart investing philosophy.
Suffice it to say, Kraft Heinz belongs on the naughty list moving forward.
Restaurant Brands International
Unlike Kraft Heinz, Restaurant Brands International (QSR 1.09%) has had a pretty good year, with shares up 26%. Restaurant Brands International, or RBI for short, is the owner of the Burger King, Tim Hortons, and Popeye's fast-casual dining franchises.
In RBI's most recent quarterly report, comparable-sales growth for Burger King was the highest it's been in four years at 4.8%, while Popeye's continues to come on strong, with comparable sales increasing 9.7%. I guess folks really like chicken sandwiches?
So, if things are going so well for RBI, why am I sticking it on the naughty list? The primary reason would be valuation. If there's one industry that's gotten ahead of itself on a valuation basis, it would be restaurants. At more than 26 times forward earnings, yet historically growing at only a mid-single-digit rate per year, RBI's PEG ratio is now very high.
The thing to understand about restaurants is that they require steady economic growth to thrive. Though we're in the midst of the longest economic expansion in U.S. history, dating back 160 years, I'd have to think we're in the late stages. Since contractions and recessions are a natural part of any economic cycle, a slowdown in growth sooner than later should be expected.
What's more, Restaurant Brands International looks to have maximized its usage of cheap capital. The company's balance sheet now sports more than $12 billion in debt and debt-to-equity of 345%. While it's not uncommon for restaurants to lean on debt as they expand their footprint, I'm worried about RBI's leverage this late in the economic expansion cycle. For that reason, this Buffett stock should be off limits for investors.
American Airlines Group
Lastly, investors should really consider grounding their expectations for American Airlines Group (AAL -0.21%) going forward for many of the same reasons why RBI isn't particularly attractive.
Buffett bought into the airline industry -- an industry, mind you, that he's chastised as being a poor investment vehicle in a previous annual shareholder letter -- in the second half of 2016. The move appeared to make sense, with crude oil dipping to as low as $26 a barrel, and therefore reducing fuel costs for airlines big-time. Since fuel is usually the highest outlay for airlines, this led to increased profitability and the ability of majors like American to be more price-competitive with discount regional airlines.
But in my view, the jig is nearly up. Crude prices have stabilized, which have allowed fuel costs to creep back into a normal historic range. More importantly, American Airlines has leveraged itself to the hilt by purchasing new planes for its fleet. The thing is, as my colleague Adam Levine-Weinberg notes, American isn't exactly getting the most out of its fleet, and has taken on an exorbitant amount of debt to modernize its portfolio. Currently lugging around $29.3 billion in net debt, American Airlines looks ill prepared for when the next recession strikes.
Considering the poor track record of major airlines as investments, I'd suggest investors stick American Airlines on the naughty list moving forward.