Like many people, I admire Warren Buffett's level-headed approach to investing. I also like a lot of the stocks that he and his team have bought for Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) portfolio. Many of them can now be bought at attractive valuations as a result of the coronavirus-fueled market sell-off.
But that doesn't mean that I like all of the stocks owned by Berkshire. Actually, there are three Buffett stocks that I absolutely, positively would not buy right now. Here are those stocks -- and why I'm staying away from them.
1. American Airlines
Buffett wrote in his 2007 letter to Berkshire shareholders about airlines, "If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down." Since then, he's changed his mind about airlines and now owns shares of three of them. The weakest of the three, by far, is American Airlines (NASDAQ:AAL).
I'm not totally against nibbling a little by buying some shares of well-run airline stocks at super-cheap prices. But the operative words are "well-run." When an entire industry is suffering horribly, if you're going to invest in it at all it's a lot better to buy the leaders instead of the laggards.
Even during the roaring economy of the last five years, American Airlines' earnings have tanked. Its revenue has grown, but by roughly half the rate of revenue growth for the other two airline stocks owned by Berkshire, Delta and Southwest. To make matters worse, American Airlines' debt load is more than twice as much as Delta's and nearly eight times higher than Southwest's.
Don't get me wrong. I'm not predicting that American Airlines will go out of business. The company will receive federal assistance. If American gets the $12 billion that it's reportedly asking for, that should be enough to enable it to weather the current storm. But buying shares of a company that needs a big bailout from Uncle Sam just to survive, regardless of how cheap it is, isn't the kind of stock that I want to pour my money into.
Biogen (NASDAQ:BIIB) isn't in nearly as dire straits as American Airlines is. The biotech stock is only down by a low double-digit percentage from its highs earlier this year. That makes Biogen a relative success story compared to most stocks in the midst of the coronavirus bear market.
So why am I dead-set against buying Biogen right now? It's way too risky for me. Most of the stock's gains in the second half of 2019 stemmed from the company's news that it would seek regulatory approval for experimental Alzheimer's disease drug aducanumab after the drug flopped in a late-stage study.
It's quite possible that Biogen will win FDA approval for the drug. However, there's also a significant chance that aducanumab won't be approved by the FDA. If it's not approved, Biogen's share price would plummet just as it did last year when the drug failed in a phase 3 study.
If I thought that Biogen had a lot going for it with or without aducanumab, the stock might interest me. However, the company's multiple sclerosis franchise is losing steam. Biogen's spinal muscular atrophy (SMA) drug Spinraza is likely to soon face a new rival with Roche's risdiplam. Unless Biogen scores a win with aducanumab, its growth prospects don't look very good, in my view. And that much-needed win seems pretty iffy.
3. Teva Pharmaceutical
I was skeptical when Buffett's initial purchase of Teva Pharmaceutical Industries (NYSE:TEVA) shares was announced in early 2018. In retrospect, my skepticism appears to be justified. Teva's market cap was cut in half by the end of 2019 -- before the coronavirus pandemic hit. And while the pharma stock surged earlier this year, it's since given up all of those gains and then some.
Granted, Teva's valuation metrics are eye-catching right now. The stock trades at less than four times expected earnings and at only 70% of its book value. That's dirt cheap. However, those numbers don't tell the full story for Teva.
The drugmaker is up to its eyeballs in debt. It spent nearly as much on interest as it did on research and development last year. Teva carries a massive amount of goodwill on its balance sheet, some of which I'm afraid the company might have to write down in the future. In addition, Teva's revenue is trending in the wrong direction due primarily to generic competition for its top-selling multiple sclerosis drug Copaxone.
Teva does have some promising new drugs on the market, with migraine drug Ajovy and muscle-disorder drug Austedo leading the way. The company has also been able to reduce its debt somewhat. However, color me as still skeptical about Teva's prospects. I think there are too many other great stocks to buy right now, including several of Buffett's favorites.