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Buffett Goes Grocery Shopping

By Chris Hill - Updated Feb 19, 2020 at 2:09PM

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Berkshire Hathaway gets a stake in United States' largest supermarket chain.

In this episode of Market Foolery, Chris Hill and Jason Moser take a look at Walmart (WMT 0.05%), whose results came in below expectations. Apple (AAPL 2.46%) lowers guidance on lower supply and weak demand. Our hosts discuss two recent purchases and sales of stakes by Berkshire Hathaway (BRK.A 0.63%) (BRK.B 0.72%). And finally, Chris and Jason did some buying and selling as well, and they tell you why.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 18, 2020.

Chris Hill: It's Tuesday, February 18th. Welcome to Market Foolery. I'm Chris Hill. With me in studio: Mr. Jason Moser. Thanks for being here.

Jason Moser: The day after Presidents' Day, let me tell you, boy! am I hungover! Just kidding. [laughs] What do people do on President ... I thought I was going to, like, cook out or something, but that's not really a cookout holiday, is it?

Hill: Not yet. Not in this part of the country. I just like that we're rank ordering this, like, there's Mardi Gras, there's President's Day.

We've got Warren Buffett doing a little buying and selling. You and I have been doing a little buying and selling. We'll get to that. We'll get to Apple's lowering of expectations. But we're going to start with Walmart.

Walmart's fourth-quarter profits and revenue came in a little lower than expected. And am I the only one who's looked at this report and was reminded of Target's (TGT 2.54%) holiday-quarter report, because it kind of it wasn't bad, it wasn't a train wreck. But particularly the fact that video games and toy sales, those segments, for Walmart, really drag down the results more so than, say, e-commerce, which was up another 35%.

Moser: Yeah. I agree with what you're saying there. It made me think of Target initially. It also made me think of Amazon (AMZN 3.59%). And Amazon really had a blowout holiday quarter. The one thing I do think the difference between Walmart and Target -- and I think the reason why the market is OK with this report --

Hill: The stock is basically flat.

Moser: Yeah. I think really it is because of grocery. I think that when you look at the investments that Walmart made in grocery so long ago. And I don't want to say skepticism, but maybe just, sort of, the furled eyebrows, like, is that really something that people want, or is that going to --

Hill: There was skepticism. There was absolutely skepticism.

Moser: Okay. But now, that's more than 50% of their U.S. sales. Like, groceries -- this is a grocery company. And so I think that's important, because it's not very surprising to see the weakness in things like toys and games and apparel -- very highly competitive markets. And we've certainly seen toys have been redefined just over the past decade thanks to technology. It's a bit of a different market altogether for that. So I do think that their strong presence in grocery helps to mitigate any of the other weakness that we might see in a quarter like this. And I mean it wasn't a weak quarter, it was a little bit below expectations. But I think there's enough to be optimistic about where the market's reacting the way it is today.

Hill: CEO Doug McMillon I think deserves a lot of credit for a lot of different things and one of them is, I think he's just an above-average communicator in terms of guidance and also just with this quarter alone, like, just coming out and saying, "Yeah, this wasn't our best." And he, in talking about e-commerce, you see him start to ratchet that guidance back and saying, like, "Look, it's going to come in lower." I would just point out that we've had I don't know how many quarters in a row of Walmart growing their e-commerce segment anywhere from the high-teens to what we saw with this latest quarter, you know, the mid-30s. So even if that scales back, it's off of a much bigger base than it was two, three years ago.

Moser: Yeah. And I can't help but wonder if we won't see another acquisition at some point here. Maybe we will, maybe we won't. I do feel like they are looking at this business more and more as an e-commerce and a grocery play that also has everything else under the sun. I mean, comps were certainly below expectations. And I think maybe the troubling part there, it was because of transactions and average ticket. I mean, transactions in U.S. stores were up 1% for the quarter, but it was 1.5% a year ago. And average ticket was up less than 1%. That was 2.6% a year ago. So there were clearly some pressures there. And Walmart is a low-margin business to begin with, so you have to be really, really aware of that kind of stuff.

I think it could be interesting to watch how -- I can't believe I'm already talking about this coming holiday season, but let's talk about that for a second, because there is a big gaming console refresh cycle coming. And I do think there is certainly potential there for them to exceed expectations. We'll see how the rest of the year goes. But you know this is a traditional retail story, right? If you look at Walmart -- I always like making this comparison, because it just tells you how the market views these two different companies. But Walmart with a market cap of $335 billion, that's on $524 billion in sales. And you look at Amazon, which is now over $1 trillion, and that's off of $280 billion in sales. And so while Walmart has grocery, which is awesome, grocery isn't AWS, and it isn't producing those same kinds of margins and it never will. But what grocery does is it keeps the traffic coming back. And we're seeing more and more, as this retail environment sort of reshapes itself, really the key is, make sure you have people in those stores, whether it's virtually or physically, make sure you have people in those stores. And grocery is one way to really, really do that.

Hill: Shares of Apple down 2% to 3% this morning after the company lowered guidance for the current quarter due to lower iPhone supply globally and weak demand in China due to the coronavirus. Apple -- it's worth pointing out -- they have not provided an updated number, they just came out and said, "Hey, the number we had given previously, the $63 billion to $67 billion range for sales, we're probably not going to hit that."

Moser: Yeah. It seems like on the surface you would think, it's not been that much time since the quarterly report, so couldn't they have just said this on the call? I mean, I understand that perspective, but I think this really is just a testament to how quickly things have changed. I mean, we've been following this more or less on a daily basis over the past couple of months, and we've seen even -- as information comes to light, it's just, it's becoming a much bigger deal than we all thought it might have been in the beginning.

I want to go into the weeds just a little bit here, but this information that I got was so cool, it puts things in context, and it helps quantify things, which I think as investors, that always helps us understand a little better. But one of our members, just a lovely woman, Susan Diaz, she's a physician, she's an infectious diseases doc, and we get to see her all the time at our events, and I get to speak with her on an ongoing basis. And she sent me a text the other day, and she was talking a little bit about this and comparing it to 2009 with the swine flu. And she was using this number, called the basic reproduction number, which essentially tells you how many individuals a contaminated person transmits the virus to in a healthy population. So it gives us a number. And so, with the swine flu in 2009, it was estimated to be around 2.4, that number was, and it infected 61 million Americans, with a global mortality of around 575,000.

Now there's some research coming out of Sweden here recently in regard to the coronavirus numbers here. And they're pegging that basic reproduction number -- right now the estimate is around 3.28, significantly higher than that 2.4 from 2009. And we know, as far as, infected Americans, global mortality rate, that is all still very much a developing story on a daily basis. But I think when you look at what went on in 2009, that gives us at least a better idea of the potential outcome here.

And to me, it's not unreasonable to think that things are going to get worse before they get better. So with Apple coming out and pulling back guidance like that a little bit, it wouldn't shock me at all to see a couple of other companies get out there and try to jump in front of this thing before it starts getting out of control. Because as with most things, particularly global sorts of secular things, you don't really have much control over it, but you do have control over the narrative and how your company handles it. And to your point, about Walmart's leadership, I think Tim Cook is another great example of a CEO who's really good at communication and just giving us the straight story so that we can understand better what the future is going to hold.

Hill: Berkshire Hathaway is going to report earnings at the end of this week, but today we got a reminder that when Warren Buffett goes grocery shopping, his version of grocery shopping is different than you and me, because shares of Kroger (KR -0.29%) are up more than 5% today after Berkshire Hathaway disclosed it has taken a $550 million stake in Kroger, which is the largest supermarket chain in the United States.

Also, sold some of the bank stocks. We'll get to that in a second. But what was your reaction when you saw this? I know that you're a fan of Buffett, but also, you're a fan of Kroger.

Moser: Yeah, I think Kroger has always been one for me where -- I mean, I'm not the biggest fan of the grocery space, in general. I think it's such a difficult space, and it's always low margin competing on price. But Kroger really does have the scale, I think, to be able to compete very effectively. We know they acquired Harris Teeter a little while back, so they have close to 3,000 stores with all of their brands together.

And they have what looks like a really growing digital business. I mean, they grew digital sales 21% in the most recent quarter. It's somewhere in the neighborhood of $5 billion to $5.5 billion of revenue for them at this point. And it seems to be continuing to gain some traction.

So this, to me, seems like just the quintessential Warren Buffett investment. I mean, he likes things that are easy to understand. This certainly is easy to understand. I think, you know, one of the things that Kroger is witnessing a lot of success with is their Our Brands brand; and that is like their generic, I guess, private-label brand. And given Buffett's penchant for some of those brands that we grew up with, you know, whether it's Philly Cream Cheese or Heinz Ketchup or whatever it may be --

Hill: Dairy Queen.

Moser: Dairy Queen. It strikes me, that's a little bit of a move away. Perhaps maybe he's seeing something there that I think a lot of us have seen in whether it's Whole Foods or Kroger. I think a lot of these stores are witnessing a lot of success in building their own private brands, and they come across as more attractive price points for consumers. So I mean, this makes Berkshire Hathaway one of the bigger shareholders in Kroger. And Kroger has not been the greatest investment in the world, it's not been bad, it's kind of been just up and down a little bit. But, you know, I think there's reason to be optimistic. It's hard for me to see Kroger being disrupted so much in the grocery space, but we also know that they're going to be competing with bigger players like Walmart for a long time to come. So I guess, that's, you know, bully for him, because he owns shares in Walmart too.

Hill: Part of Berkshire's 13F filing included the information that they've sold-off some of the Goldman Sachs and some of the position in Wells Fargo. And you go back to last summer, Berkshire Hathaway has sold more than 20% of its stake in Wells Fargo. And that just struck me as interesting, because Warren Buffett continues to be publicly supportive of Wells Fargo, but when you look at what's happening with the portfolio, the position is getting smaller. Smaller off of being one of the largest positions that Berkshire Hathaway owns, but still, it's getting smaller.

Moser: Yeah. And he's got to be thoughtful about that going forward, because that is money that could be put to better use elsewhere. I mean, that's why we always talk about selling being such a tough decision. But one of the reasons why you would sell is if you feel like that money could be put to better use somewhere else. And I would imagine that they are looking at something like Wells Fargo and looking at some of these big banks and thinking, well, they have really big stakes in these positions they've held for a long period of time. And I do believe there are some regulatory concerns there as well, like, their ownership stake can only get so big before they start triggering certain requirements or events. So I think they try to keep that stake at a certain number or below it.

But, I mean, still, we do talk about that all the time with Wells. And he doesn't seem to be as critical, maybe, of them as we've been. And I was a little bit disappointed in that, to be honest with you, because I felt like it was a good opportunity to be a little critical for a company that -- when we talk about culture and how much it means to him and it means to us, I mean, that was a really big culture problem in Wells.

But I personally was more fascinated with any of these. I was fascinated with the stake in Biogen. And even not a big stake, I think it's just less than 1%. But, you know, talk about investing in things you understand. I don't know that he's necessarily a biotech guy, but it was such a small stake, maybe he's taking the basket approach, Chris. Maybe he listens to our show.

Hill: There's no chance he listens to our show.

Moser: Maybe.

Hill: However, you just reminded me. Part of this 13F filing -- which always requires, in the case of Berkshire Hathaway, reading tea leaves -- there's no claim on who made the trade. So in the case of Wells Fargo, there's almost no way that gets sold off without Buffett saying so. So I feel pretty confident in saying the Wells Fargo sale, that was Buffett's call. The Biogen stake -- on the flip side -- that seems like it's Todd Combs, Ted Weschler, one of those guys.

Moser: It might not necessarily be in his --

Hill: It isn't Charlie Munger.

Moser: Probably not. I mean, probably not.

Hill: God bless Charlie Munger, but it's not him.

Moser: Yeah, I would agree. And I think to me, once I saw this and then I thought back a few weeks ago, when I had Shannon Jones on the "Wild Card Wednesday" for Industry Focus and we talked healthcare, and we specifically focused on a lot of these earnings reports for these companies. And Biogen was one, and she gave us a little bit of interesting backstory, in that -- I'm going to butcher this name, I'm sure -- but this drug that they've been working on in regard to Alzheimer's, Aducanumab, I think I nailed it. Aducanumab. Anyway, this is a drug that had gone through clinical trials for Alzheimer's and ultimately didn't work out, but there are some retrospective studies that started to bring into some question the dosing and thinking, "Okay, well, maybe it's less about the drug and more about the dosing."

And so bottom-line is, this year is shaping up to be a very important one for Biogen, because if this drug can go back through trials and show any signs that even the dosing might help ... I mean, Alzheimer's is obviously a serious problem, and it's one where -- I think Shannon said something like, "99% of all Alzheimer's drugs fail." So we need something, right? And to see the potential here, for a company who has really levered success on MS more than anything else up to this point, I think there are a lot of questions in regard to what its next act was. And if this can prove to be its next act. I mean, we've got 5.8 million Americans that could really benefit from this. And that could be somewhere in the neighborhood of $10 billion in revenue for this company in the coming years if it actually makes it through. So there is a catalyst there, if this works out, I can see their interest in the company, I thought it was fascinating that they bought it.

Hill: I want to ask you a small favor.

Moser: Sure.

Hill: Not of you, but of the dozens of listeners. To you listening, I'd just like to ask a small favor. We have a quick survey, and if you could help us out with the survey, it would be great. The link to the survey is going to be in the description of this episode, but it's really just to help us learn more about who's listening. It's an anonymous survey, it'll just take a couple of minutes, but whether you just started listening in the last couple of months or you've been listening for years, if you could help us out with the survey, we'd really appreciate it.

As I mentioned at the top, you and I each did a little trading last week.

Moser: And we don't have to file 13Fs, but --

Hill: [laughs] No, we don't have to file.

Moser: We do have to report for the company.

Hill: Yes, absolutely. You sold a stock last week; I bought a stock last week. And you just, a couple of minutes ago, said that the decision to sell a stock is a difficult one. How difficult was it for you to pull the trigger on selling TripAdvisor?

Moser: Ultimately, it was difficult leading up to determining what I was going to -- it was difficult for me to kind of figure out what the line was. And then I ultimately decided, "Okay, I want to see how they see 2020 shaping up." And that was going to be my line. And so, TripAdvisor had been -- I guess, I owned it for probably the better part of four years or something. And I always felt like it's been a wonderful service, I use it when I travel all the time, it really helps. But you know, we talked about this, I think, ad nauseam on this show and Motley Fool Money and others, about how they've just not been able to -- they tried to pivot and become an OTA. That, I think, really backfired on them. And now they've been really trying to recover from that ever since.

So I thought, "Hey, let me see how this quarter was and let me see how 2020 is shaping up and if there are some signs of life then -- [...] the biggest position in the world, I'll hang on to it. But after this report, I mean, this is a business that's shrinking, it's a business that's not growing.

And I put something out on Twitter a little while back. And really, it is this simple in a lot of cases is, when you think about owning a stock, whether it's a stock that you own or a stock that you want to buy, you just ask yourself the very basic question, is this a good business? And I mean that from the perspective of understanding the financials, how the company makes its money. Not a consumer perception, but look at the financials, look at the business, is this a good business? And if it is, well, then that can lead to some other questions. But if you say, "No, it's not." To me, that's cut and dry.

And I looked at TripAdvisor, I said, "Is this a good business?" No, it's not. It's shrinking. Management is stuck. They don't know what to do. And the big signal for me was last quarter, when they talked about reassessing everything, paying this massive special dividend, continuing to repurchase shares, there was no talk about growth and all of these new avenues -- to me, it's a business that's just stuck in neutral, and I'm done with it. That money could be put to work in better places, and so that's what I did.

Hill: So I bought a few shares of Bed Bath & Beyond last week. So last week Bed Bath & Beyond, the stock fell about 20% on a single day. Mark Tritton came out and just said, "It's not going to be pretty in 2020, it's going to take a while to turn this around." And I looked at the drop and I thought, "Boy! that's ... " you know. And I totally understood why the drop happened, particularly with the short-term mentality on Wall Street, the whole, look, if you're an institutional trader, you're thinking three, six months, those are your time frames. And look, it's early in 2020, and if the CEO comes out and says, "It's not going to be pretty this year," then there is absolutely no reason to buy the stock and there is every reason to sell it.

But I thought, I got some time. And this is a -- although, I did -- and I mentioned this to our colleague Aaron Bush, I did hear in my head the voices of both Aaron Bush and David Gardner. I heard Aaron Bush saying, "Why would you buy this business?" Because it is one of the last businesses he would buy shares of. And I heard the voice of David Gardner saying, "Only dips buy on the dip." But I just thought, boy! You know what, I have talked about this company for a long time, have never owned shares of it, and have said for a long time, similar to Under Armour, where Under Armour makes good stuff, it's just every other part of retail that they appear to be bad at. Bed Bath & Beyond, they sell stuff that people need. This isn't Dave & Buster's. This is not a discretionary-income business. There was a version of this business that can and should work. And I guess at the end of the day, it was a small bet on Mark Tritton, the new CEO, and a very small bet.

Moser: And I think that's a great way to look at it, because if you went through my little question of, "Is this a good business?" You can say, "No."

Hill: By the way, while you were saying that, I was thinking, "Oh, God! this is going to be ugly." Because right now, Bed Bath & Beyond, not a good business.

Moser: So now let's introduce the caveat to that question for our listeners, because you can answer "No," and then still buy the stock. And why would you do that? Well, there's a value play there, right? And that's the ultimate thought, is that, I'm not saying this is a business that I want to own for the next 5, 10 years, maybe it is, maybe Mark Tritton goes in there and just does stuff that we just never could have imagined and turns this thing around into something that's unfamiliar to us today. I mean, that's value investing, and really in its purest form. You're not necessarily finding the best businesses in the world, but you're just finding these pricings. And my guess is, if that stock doubled over the course of the coming few months, you might just say, "Hey, well, that worked out OK and I wipe my hands clean of it and just walk on out the door." But, yeah, I think that's a good way to look at it, because you're thinking, "Hey, there's something here and it's OK to say I am making a bet on this CEO." That's the jockey play, right?! There are plenty of examples of that.

And it's so funny that you brought up Under Armour, because that was the one that was running through my mind as well: The short-term versus long-term nature. Once they come out and say, "Hey, 2020 is going to be a restructuring year." I mean, we said it before, that's investor code for "just run for the hills." But if you've got three to five years to play with, that's where you can find some really neat opportunities.

Hill: And I didn't talk to him beforehand, but later I found out that famed value investor Ron Gross also picked up some shares. Same day. So I thought, all right, for value investing, I feel like I'm in good company, if I'm pulling the same trigger as Ron Gross. I'm like, all right. That feels validated.

Moser: I mean, I feel like this is a Motley Fool Money story in the making, right? We got to get this on the list for Friday.

Hill: Thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of Market Foolery. The show is mixed by the Iron Man, Austin Morgan. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon, Under Armour (A Shares), and Under Armour (C Shares). Jason Moser owns shares of Amazon, Apple, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Apple, Biogen, TripAdvisor, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Apple, and 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 March 2020 $225 calls on Berkshire Hathaway (B shares). The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
$46.73 (-0.29%) $0.14
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$442,811.99 (0.63%) $2,754.24
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$294.88 (0.72%) $2.11
Apple Inc. Stock Quote
Apple Inc.
$168.99 (2.46%) $4.07, Inc. Stock Quote, Inc.
$142.78 (3.59%) $4.95
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$128.93 (0.05%) $0.06
Target Corporation Stock Quote
Target Corporation
$169.32 (2.54%) $4.20

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