Few investors on Wall Street are more influential than Berkshire Hathaway (BRK.A 0.48%) (BRK.B 0.09%) CEO Warren Buffett. That's because almost no one can hold a candle to the Oracle of Omaha's investment track record. Since the beginning of 1965, Berkshire Hathaway's stock has averaged an annualized return of 20.3%, which more than doubles up the broad-based S&P 500's 10% annualized total return (total, as in including dividends paid) over the same period. As a whole, Buffett has overseen more than $400 billion in value creation for shareholders, and an aggregate gain of 2,744,062% in Berkshire's stock.
But Warren Buffett isn't perfect. Even the best investors in the world make mistakes from time to time. For instance, his company's stake in U.K. grocer Tesco resulted in sizable losses. Meanwhile, Buffett's decisions to sell Disney on two separate occasions decades ago has cost the Oracle of Omaha a would-be fortune.
Though a strong case can be made that the vast majority of the 49 stocks/ETFs held in Buffett's portfolio are headed higher, three Buffett stocks stand out for all the wrong reasons and are worth avoiding like the plague.
First up is the fastest-growing company in Berkshire Hathaway's portfolio: Snowflake (SNOW 1.54%).
Snowflake is a cloud-based data warehousing company that will likely see sales grow by nearly 90% in fiscal 2022. Since Buffett likely has no clue what Snowflake does, its inclusion in Berkshire Hathaway's portfolio is almost certainly the work of Buffett's investing lieutenants, Todd Combs and Ted Weschler.
The company itself is unique and very high-growth. It layers its cloud-based solutions over many popular cloud infrastructure platforms. Typically, it's difficult to share data if two parties are using a different cloud service provider, such as S3 or Azure. However, Snowflake customers can break through these barriers by seamlessly sharing data, regardless of the underlying service provider.
Snowflake also operates on a pay-as-you-go model, rather than a subscription-based one. Charging its clients based on the amount of data they store and the number of Snowflake Compute Credits used allows for improved transparency and potential cost-savings for businesses using its solutions.
But Snowflake is also very pricey. In fact, it arguably holds the highest premium of any software-as-a-service (SaaS) stock. Whereas most SaaS stocks boast price-to-sales ratios in the 20 to 40 range, Snowflake is valued at almost 100 times next year's full-year sales. There's the market being forward-looking, and then there's adding years' worth of implied growth into a company's valuation and assuming it'll occur without a hitch. The latter is what you're getting with Snowflake.
I like what the company is doing and appreciate the product, but not the irrational exuberance that's lifted Snowflake's valuation into the stratosphere. Unless we see a significant pullback, Snowflake is a stock worth avoiding.
Another Buffett stock that investors would be wise to avoid is consumer packaged goods giant Kraft Heinz (KHC 0.83%).
Like Snowflake, this stock's appearance here might surprise some readers. After all, Kraft Heinz is behind over a dozen well-known global food brands. It's also benefited from the coronavirus disease 2019 (COVID-19) pandemic. With people choosing to stay home, Kraft Heinz's easy-to-make meals have found new life in 2020. The company's third-quarter operating results featured an eyebrow-raising 6.3% lift in organic net sales from the prior-year period.
But one year does not a trend make.
In 2016, Heinz grossly overpaid for Kraft Foods. This left the company lugging around a boatload of debt and a monstrous amount of goodwill. Even after a massive $15 billion goodwill writedown in 2019, the company's balance sheet remains a mess.
Part of Kraft Heinz's transformation strategy involves netting $2 billion in gross productivity efficiencies by 2024 to offset inflation and cash needed for other important investments. I believe this represents just the tip of the iceberg in terms of much-needed cost-cutting, since the company is constrained by over $28 billion in debt. Kraft Heinz has tried to move some of its noncore assets to reduce debt, but has found little interest for them.
I suggest leaving Kraft Heinz on the shelf.
The third Buffett stock to avoid like the plague is blue chip biotech Biogen (BIIB 2.25%).
Keeping with the theme, a superficial look at the company probably wouldn't raise any red flags. Biogen is valued at less than 10 times Wall Street's earnings per share consensus for 2021, and it's on track to generate at least $5.3 billion in free cash flow for a third consecutive year in 2020. Considering that most biotech stocks are losing money, Biogen probably looks like a gem.
Unfortunately, two building blocks in Biogen's long-term success seem to have crumbled in recent months, crushing any hope of meaningful growth in years to come.
First, generic-drug developer Mylan (now part of Viatris) was successful in challenging intellectual property surrounding Tecfidera, Biogen's blockbuster multiple sclerosis drug. Even facing the prospect of damages in court tied to patent infringement, Mylan launched a generic version of Biogen's Tecfidera in August. Tecfidera's patents were previously expected to hold up in court until 2028, so this will be a big blow to Biogen's cash flow.
The second issue is the expected failure of experimental Alzheimer's disease drug aducanumab. Despite inspiring hope in late-stage clinical studies, a Food and Drug Administration (FDA) panel overwhelmingly recommended against approving the treatment in November. Though the FDA is not obligated to follow the vote of its panel, it's tough to see the regulatory agency giving aducanumab the green light in 2021. This is a treatment with up to $10 billion in peak annual sales potential that may not net Biogen a dime.
With so many other great biotech stocks to choose from, I'd advocate keeping your distance from Biogen.