While debatable, there's probably not a more revered investor than Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett. Having begun with $10,000 in seed capital in the 1950s, Buffett has built his net worth to almost $75 billion, which doesn't include the tens of billions he's graciously donated to philanthropic ventures over the years.
His actions have also helped create almost $400 billion in value for Berkshire Hathaway's shareholders. Since 1965, Berkshire's per-share market value has increased by 20.3% on a compound annual basis (more than double the 10% compound annual return of the S&P 500, inclusive of dividends, over the same time frame), leading to an aggregate return of more than 2,744,000% through 2019.
But even the greatest buy-and-hold investor on the planet occasionally picks a dud. While many of the 52 securities in Berkshire Hathaway's portfolio look like long-term winners, three Warren Buffett stocks look as if they should be avoided at all costs.
American Airlines Group
If I were to rank Buffett's 52 holdings from "buy now" to "avoid like the plague," American Airlines Group (NASDAQ:AAL) would be in its own ZIP code of avoidance.
Although crude oil was exceptionally cheap in 2016, when Buffett initially took his stake in American Airlines, I never quite understood his interest in the airline industry. Although American has been buying back its stock, which is a corporate trait Buffett has long been a fan of, he has also been highly critical of the airline industry in the past. In particular, he has implied that it's an industry with high input costs that tends to generate very low margins. It's also an industry that struggles mightily anytime there's even a hint of recession, making airline stocks a poor long-term hold.
What makes American Airlines the worst of the worst is the company's debt load. As my airline-focused Motley Fool colleague Adam Levine-Weinberg has pointed out, American wound up replacing its fleet with new planes far earlier than it needed to, and in the process ballooned its debt. Even with federal stimulus package assistance, American Airlines is lugging around close to $30 billion in net debt with no clear picture of when traditional air travel will resume.
Furthermore, with share buybacks and future dividend payments suspended, perhaps the only reason to even consider owning American Airlines Group has been removed. This is absolutely a Buffett stock to avoid.
On a year-to-date basis, packaged food and beverage company Kraft Heinz (NASDAQ:KHC) has actually outperformed the broader market by losing only 10%, inclusive of dividends paid. But this is also a company that's shed 70% of its value over the trailing three years and has given no indication to Wall Street that it's near a turnaround.
The biggest issue for Kraft Heinz is the company's balance sheet, which is an absolute mess. There's no question at this point that Heinz grossly overpaid for Kraft Foods, and the company is now facing the repercussions of that overpayment. In February 2019, Kraft Heinz wound up writing down more than $15 billion in goodwill and intangible assets tied to a number of its brands.
But this writedown didn't clear up its balance sheet -- it merely took it a few steps in the right direction. Of the company's $101.5 billion in total assets at the end of 2019, intangible assets accounted for $48.7 billion, with another $35.5 billion in goodwill. That compares to just $2.3 billion in cash and cash equivalents and a whopping $29-billion-plus in long-term debt.
The point of these figures is to show that Kraft Heinz has virtually no financial flexibility to turn around its struggling business. The company could choose to divest some of its brands to raise capital and reduce its debt load, but the market for packaged-good divestments hasn't been that strong over the past year.
With sales growth expected to remain flat or down slightly in the years to come, Kraft Heinz's only recourse is to cut expenses and/or sell off noncore brands. That's a strategy built on finger-crossing, not strength.
Lastly, one of Buffett's more recent bets in the oil industry, Occidental Petroleum (NYSE:OXY), looks like an absolute train wreck that investors will want to avoid.
Last year, Buffett wound up supplying $10 billion to Occidental to sweeten its takeover bid for Anadarko. In return for this $10 billion investment, his company received preferred shares of Occidental stock that yield 8%, as well as warrants to purchase up to 80 million shares of Occidental common stock at $62.50 a share. It looked like a killer deal at the time, especially with Occidental Petroleum planning to sell some of its noncore assets to reduce its debt load.
Then COVID-19 hit, and everything we though we knew about the oil industry was tossed out the window.
Thus far in 2020, Occidental has slashed its capital expenditure budget twice, with the newest range of $2.7 billion to $2.9 billion nearly half of the $5.2 billion to $5.4 billion it planned to spend this year. The company's dividend has also been cut by 86%, and Occidental was forced to pay Berkshire Hathaway's 8% yield in common stock (as opposed to cash) in the most recent quarter. By issuing stock to make good on its interest payments to Berkshire Hathaway, Occidental will be consistently diluting existing shareholders.
To make matters worse, Occidental ended the previous quarter with $41 billion in debt (about $38 billion in net debt), and it could see a number of planned asset sales fall through given the disruption we've witnessed in the oil market. There are far too many questions and not enough answers, making this stock easily avoidable by investors.